The Retired Investor: Out of Gas
Winter approaches and with it a potential natural gas crisis. Areas of Europe are already scrambling to find the energy required to heat homes and continue their economic rebound. Could the U.S. be next?
Over the last year, prices for European natural gas have jumped by almost 500 percent. Natural gas prices on this side of the pond have also spiked by more than 100 percent this year. But it isn't just countries in the Northern Hemisphere that are feeling the scarcity. Parts of Asia, which are importing liquified natural gas (LNG) at record prices, are being forced to switch to coal and heating oil as LNG shipments decline. Japan and Korea are somewhat protected so far, thanks to their use of long-term LNG contracts, but not so with China.
China, the world's largest importer of natural gas, is having a power crisis as a result of the shortages. Many provinces are rationing electricity to industries. This is resulting in production cutbacks in cement, steel, glass, plastics, and a host of other products.
Brazil, and other areas in South America, depend on hydropower for much of their energy. However, serious drought has reduced the flows in various rivers such as the Parana Rover basin. The output of energy has declined to the point that utilities have been forced to make up the loss through natural gas imports.
The present shortages have multiple sources. Industrial production in this post-pandemic world has surged, which has expanded demand for natural gas and LNG. Climate change from a cold and flooding European spring to a grueling hot summer in Asia also boosted energy demand. Russia, the main gas supplier to most of Europe, has been piping less gas into European stockpiles. Whether by accident, or on purpose, is anyone's guess.
Alternative energy sources have also contributed to the present shortage. Politicians, ESP advocates, and the wind and solar sectors have argued that "going green" makes increased investment in natural gas production and exploration unnecessary. Only now, in this crisis environment, is the world realizing that transitioning to cleaner fuels will require a decades-long period. In the meantime, we will still need natural gas as an integral ingredient to the world's power supply, which fuels so much of our industrial and residential sectors.
This winter, with huge demand from the world, importers are looking to Qatar, Trinidad, Tobago and especially the U.S. to increase supply. Unfortunately, the U.S. is experiencing its own shortfall in supply. Blame climate change once again for some of that. Summer heatwaves and back-to-back hurricanes have disrupted production and distribution, while increasing overall energy demand and consumption. Our own economic recovery has also diverted more consumption of natural gas away from residential use to industrial sources.
Then there is the reduction of U.S. gas production. "Fracking" has become a dirty word in many areas of the country. As a result, shale drillers are far more focused on achieving acceptable climate goals and increasing dividends and buybacks of their stock than in raising production. Energy analysts predict that there is little new gas coming online anytime soon — an increase of just 1.1 percent over the next six months. That is a big change from the recent past when our domestic surplus of gas was climbing steadily, and exports of U.S. LNG was the wave of the future. In the short-term, there is no real alternative to looming shortages.
Readers should brace for the highest energy prices they have seen in many years this winter. But if that is the only impact, we should consider ourselves lucky. The risk is that we follow Europe's and Asia's lead and experience widespread cutbacks in production. That would damage economic growth, while adding to the already rising rate of inflation. An environment that could cause stagflation. About the best we can hope for is a mild winter, but in this era of disastrous climate change, what are the chances of that?
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@theMarket: The Dip Buyers Return
Last week, investors suffered through the gloom and doom of a declining market. Many Wall Street equity strategists added to the angst by predicting terrible times ahead. I begged to differ, counting on dip buyers to save the day once again. And that is exactly what happened.
In case you missed it, last Friday, the S&P 500 Index was at an important level, hovering just below its 50 Day Moving Average (DMA). This had happened several times before since March 2020, and each time buyers appeared to "buy the dip."
"I suspect they will again," I wrote, "so, no, I won't get bearish quite yet. I will go the other way and predict that markets will bounce next week. But what if I am wrong? Technically, the downside risk could be another 80 points (1.8 percent) to around the 4,365 level on the S&P 500 Index."
As it turns out, I was right on both counts. Buyers swooped in at the lows an hour before the close on Tuesday, September 21, 2021. The S&P 500 Index ended the day at 4,357, just eight points lower than my worst-case scenario. We proceeded to rally through the remainder of the week, regaining the 50 Day Moving Average and then some.
That doesn't mean we are quite out of the woods just yet. This week the children in Washington, D.C. that we call our "legislators" are once again squabbling over increasing the nation's debt ceiling. The federal debt ceiling has been raised more times than I can count, but it has never been reduced.
In 2019, the debt ceiling was suspended for two years under a bi-partisan agreement. At the time, former President Donald Trump was busily increasing the nation's debt by $7.8 trillion (after promising he would reduce it). Instead, Trump engineered the third largest increase in our debt (relative to the size of the economy) of any U.S. president in history. The federal debt rose from $19.95 trillion in 2018 to $27.75 trillion by the end of his term — up 39 percent, or 130 percent of GDP. Why am I bringing this up?
Because the Republican Party opposes raising the debt ceiling. I won't bore you with the details, other than to remind readers that the debt ceiling today is where it is because of yesterday's bills. Specifically, it is the spending that was authorized and spent by those very same Republicans who now refuse to pay their bills. Wall Street, one would assume, is totally inured to this theatre, but I suspect it still may cause some temporary volatility throughout the next few weeks.
In addition, there may be some drama next week around funding the government. A spending bill — called a "continuing resolution" — that would keep the government running after its current fiscal year ends on Sept. 30 needs to be passed, or the government could shut down.
Government shutdowns have happened before, most recently when the former president held the country hostage demanding billions for his now rusting and dilapidated "Wall." The markets took this in stride. All he really managed to do was make the holidays miserable by denying paychecks to thousands of government workers. In any case, a shutdown could add uncertainty to the markets.
Of course, the market-moving news this week was the upcoming tapering of bond purchases by the Federal Reserve Bank. On Wednesday, Fed Chairman Jerome Powell, after the FOMC meeting, announced that the Fed had met both its inflation and employment targets and the time to taper was coming. It could be as soon as November or December—barring any unforeseen pitfalls. He left the door open to delay if something like an upsurge in the coronavirus threatens the economy.
The meeting notes also revealed that the committee membership was about evenly split on when they might begin to raise interest rates. An interest rate hike could happen as early as next year or be delayed into 2023. The markets took the announcement on board, and while the news was decidedly hawkish, investors were expecting it. Stocks rallied further on Thursday (Sept. 23)and into Friday (Sept. 24) before some profit-taking set in.
This should go down as a September to remember, and it is not over yet. In the days and weeks ahead, we may suffer through another such pullback and test some of those lower levels of last week. If we do, I suspect the dip buyer will again save the day. In the meantime, stay the course and stay invested. Next up, October.
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The Retired Investor: Weather Worsens Global Trade
Changes in climate are impacting a global economy that is fighting to recover from a pandemic. Supply chain bottlenecks continue to worsen as continuous weather-related catastrophes close ports, and snarl land, sea, and air transportation routes. Can it get any worse?
Yes, and it probably will, according to climate experts. Nearly all actively publishing climate scientists agree that humans are causing global warming and climate change. The less than 2 percent of experts that disagree have published contrarian studies that either cannot be replicated or contain errors. I'll go with the consensus on this issue.
Here in the U.S., we receive ample proof of that change almost on a daily basis. I have lost count of the number of hurricanes hitting our shores so far this season. Rivers are drying up, some permanently, while heat domes and uncontrolled forest fires afflict the American West and Pacific Northwest. Similar occurrences are happening throughout the world from flooding in Germany typhoons in Asia and drought just about everywhere.
These weather-related events significantly increase the price of production, no matter the product, while reducing the speed with which supplies can be delivered. The quality of goods and services also suffers. Increasingly, the timing of deliveries is being thrown into disarray. Delays in components and parts that may make up a finished product further disrupts supply chains. If you add in shutdowns and labor shortages caused by the ongoing pandemic, you may now understand why some consumers are doing their holiday shopping in September rather than December.
Swiss Re, a world-class insurance company, recently predicted in a research report that the effects of climate change could shave anywhere from 11 percent to 14 percent off global economic output by 2050. That comes to $23 trillion. Every year, however, billions of dollars in lost trade go unreported and uncounted.
Using the U.S. as a ready example, over the past four decades, we have suffered through 300 weather and climate-related disasters that cost the country more than $1 billion each in losses. In 2020, there were 22 such billion-dollar disasters. But none of those losses include the disruption in economic output and lost trade that accompanied the death and destruction.
Until recently, supply chain managements considered weather as a short-term risk where disruptions would be temporary at best. Only now are companies realizing that they need a long-term understanding of weather and climate trends that encompass several years or more. How to mitigate this physical climate risk on supply chains is becoming, quite literally, a hot topic.
Most of the world's populations, for example, lives near seacoasts, where there is increasing risk that sea levels will rise, causing more storms, flooding, and hurricanes. Buying, or building a property (or contracting with a supplier) in a coastal area that lacks infrastructure protection in the event of coastal flooding may no longer be advantageous. Factors like this are now becoming more of a consideration among corporate planners.
Climate-driven weather extremes are most evident and visible in the area of food production. Prices are skyrocketing and scarcities are becoming more frequent.
Problems in pork production in China, tomatoes in California, sugar and coffee in Brazil, and grains of all kinds in various locales are devastating certain producers while benefiting others. Human-driven climate change is hammering agricultural areas throughout the world.
I could also address the risk to the world of a diminishing water supply, but by now you are getting the idea that climate change is not only here to stay but its impact is increasing. It is going to make goods and services less plentiful and far more expensive in the years ahead. Corporations that plan today for the risks ahead should come out on top.
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@theMarket: Markets Enter the Danger Zone
It has been a bumpy week for stocks, and it could get worse if you believe the headlines of the financial press. The issue I see is that just about everyone is expecting a nasty period ahead for equities. That makes me somewhat bullish.
Calling short-term market moves in this environment is akin to fortune-telling. It is short on analysis, and long on my gut feelings. Granted, I too, have been warning folks that the September-October 2021 time period has been a seasonally difficult time for equities. My column last week addressed the possibility of a 5-10 percent correction, and what investors should do about it.
The media has now proclaimed that we are entering a "danger zone" for stocks, which stretches from today through the end of the month. Today, Friday, September 17, 2021, is also widely expected to be extremely volatile. It is a "quadruple witching" day when derivatives of stock index futures, stock index options, and single futures expire simultaneously. This event happens once every quarter on the third Friday of March, June, September, and December.
It is usually a big volume day in the markets. Individual stocks and indexes sometimes see large price swings during the day and into the last hour of trading. The media has everyone worked up that somehow the "danger zone," combined with "quadruple witching," spells doom for the markets. I beg to differ. While volatile, these events have proven to have little impact on the markets after the one-day expiration. Losses are usually recouped throughout the following days.
The contrarian in me also wonders how useful it is to worry about the next two weeks in the market. When everyone else is on one side of the boat, I tend to lean the other way. Headlines like "investors brace for more September volatility" just adds to the noise, and leaves little left to discount on the downside, at least for now.
What could move the markets higher? Well, we have another FOMC meeting coming up on Wednesday, September 22,2021. I expect the Fed will wait until November before pulling the trigger on tapering. That will cheer up most investors. There was also some good news on the economic front.
As most readers are aware, U.S. consumer spending is a massive part of the Gross Domestic Product of this country (about 70 percent). Thanks to the pandemic, incomes were boosted by fiscal stimulus, while at the same time, spending was depressed amid the lockdowns. Economists believe that as a result, consumers' savings have accumulated to the tune of $2.4 trillion or more. That is a lot of firepower and leaves the typical consumer with a combination of extra cash and lower debt.
That thesis came home to roost this week. Consumers defied expectations and went shopping. Retail sales in August 2021 jumped 0.7 percent, which surprised the markets, since consumer confidence readings had been falling sharply in recent weeks. That led most economists to expect a decline of 0.7 percent. It seems that those rising incomes, employment, and accumulated savings kept the consumer shopping, despite fears about the Delta variant.
The S&P 500 Index is at an important level, hovering just below its 50 Day Moving Average (DMA). This has happened several times before since March 2020, and each time buyers appeared to "buy the dip." I suspect they will again, so, no, I won't get bearish quite yet. I will go the other way and predict that markets will bounce next week. But what if I am wrong? Technically, the downside risk could be another 80 points (1.8 percent) to around the 4,365 level on the S&P 500 Index.
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The Retired Investor: Moderates Winning on Tax Debate
For months, wealthy U.S. taxpayers and corporations have been living with the specter of higher taxes under the Biden administration. It is a pretty good bet that taxes will go up, but not as much as you might expect.
Throughout the week, Democrats in the House and the Senate have been horse-trading over the amount of spending versus the amount of taxes necessary to pay for President Biden's $2.3 trillion budget plan. Republicans are already on record that they will oppose any new tax hikes at all.
Since the Democrats hold such a slim majority in both the House and the Senate, any legislation will need to accommodate both moderates and progressives within the party in order to pass. The battle between the progressives and the moderates has already started.
It appears that Senate progressives, like Bernie Sanders and Elizabeth Warren, along with House liberals, such as Alexandria Ocasio-Cortez, will need to temper their expectations on how high the corporate tax rate (and other taxes) should be raised. Draft legislation, released this week, indicated that the corporate tax rate, which is at 21 percent, may rise to 26.5 percent (on anything over $5 million in income) and not the 29 percent that was first suggested in the president's initial proposals.
As for individual tax rates, there is some on-going discussion among moderates who might want to raise the top bracket for wealthy individuals and married couples by $50,000 or so.
The original idea was that those individuals earning over $400,000 per year (and married couples earning over $450,000) would be taxed at 39.6 percent, up from 37 percent starting in 2022.
However, the key battle will still-to- be waged is over changes to the capital gains tax.
Under current law, people who die with unrealized gains don't pay capital gains taxes. Their beneficiaries do pay, but only on gains dated after the prior owner's death, and only when they actually sell those assets. The Biden plan would treat a death in the same way the IRS treats a sale, that is, a capital gains tax would automatically be applied.
The initial proposal would also increase the capital gains tax from 23.8 percent to 43.4 percent. The House Ways and Means Committee has suggested limiting the capital gains tax to just 25 percent, which does not sit well with progressives.
Capital gains taxes are a sore point for many (but not all Democrats), who have complained for years that the present tax laws unfairly benefit the wealthiest Americans. Not so, say others. Moderates argue that there are plenty of small family businesses and farms that would be devastated by these changes.
The Biden proposal would offer a $1 million exemption to everyone and would allow farm and business owners to defer taxes as long as their businesses remain family-owned. A new
Senate Finance Committee proposal would ease the capital gains hit by raising the per-person exemption to $5 million, and up to $25 million for family farms.
Then there is a group of senators and congresspeople (regardless of whether they are progressives or moderates) from New Jersey, New York, and other high-tax states that are insisting that they won't back a budget deal without a relaxation of the limits on the state and local tax deduction, the so-called SALT tax passed in 2018 by Republicans. Progressives are just as insistent that the lion's share of these benefits would accrue to the rich and not the middle class. A compromise might be found in capping any SALT tax breaks to a specific middle-class income bracket.
As you can imagine, this debate is not over. I expect it will take at least two more months before a compromise will be hammered out between the opposing wings of the Democrat Party.
Investors can be almost certain that taxes will rise for some, but the sting will be lessened to some degree.
Fortunately, the chances of compromise are quite high, especially when one considers the stakes. The expansion of the U.S. social safety net, the critical need for a new climate policy, and the fact that mid-term elections are not that far away, indicate a deal will get done.
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