The King's Speech

On Tuesday, March 4th President Trump addressed a joint session of Congress.  I do not begrudge our President the opportunity to take a victory lap; particularly on the heels of six busy weeks of cabinet hearings, executive orders, reductions in force, court hearings, spending freezes, tariffs followed by pauses, starts and follow-up pauses of the the latter.

The speech was exceedingly long however; meaning the volume of dubious claims or lies was target-rich.  Nothing new under the sun; nevertheless, worthy of truthful daylight.  Consequently, from time to time one of more of the King's gems will be featured here.

Enjoy. 

“We have had $1.7 trillion of new investment in America in just the past few weeks.”

This is a spurious figure, and Trump frequently takes false credit.  Most of this claim comes from statements by Apple ($500 billion) and Saudi Arabia ($600 billion). But Apple has a practice of making this sort of announcement after the installation of a new president.  In 2018, Apple announced it would contribute $350 billion to the US economy over five years; it made a similar commitment in 2021 during the Biden administration. The most recent announcement mostly overlaps with the latter 2021 announcement.

As for Saudi Arabia, who knows.  Word is that this was floated in a phone call between Trump and the Saudi leader.  In 2017, Trump claimed Saudi Arabia had struck $350 billion in deals.  Yet, after further inspection and analysis we learned that the "deal" was a haphazard collection of magical wishful thinking, fuzzy math and double counting.  In the end almost all of the investment occurred in Saudi Arabia - no the United States.

The president also talked-up a $100 billion investment in AI data centers; truthfully, OpenAI chief executive Sam Altman had launched the Stargate deal almost a year before Trump was inaugurated.  

Finally, a $100 billion investment announced by Taiwan Semiconductor Manufacturing Co. was originated by former president Biden and included funds from the Chips and Science Act, a bipartisan piece of legislation that passed in 2022.

So yeah, wink wink, tall tales and don't pay any attention to that man behind the curtain. 

Is It Only The Economy, Stupid?

A variation on the title of this post was coined by strategist James Carville as a missive to campaign workers leading up to Bill Clinton's successful 1992 presidential campaign against incumbent George H. W. Bush.  I've written about the subject many times over the years.  Is it only about the economy?  Or is there more?  I would postulate that it is the economy and much  more.

Tomorrow Donald J. Trump will be sworn-in as America's 47th President.  Who, in the lead-up to the festivities, would tell you that he alone can fix our country's hellscape of lawlessness, disorder, economic collapse, inflation, energy dependence, mobocracy, crisis and chaos.

Perhaps you share that view.  Not me; I would submit that by any rational measure of the condition of the United State of America the president-elect will be taking over a country in rather decent condition. Let's take a walk thru the relevant numbers.

Contrary to what the president-elect will tell you drug overdose deaths are down and the manufacturing sector has created more jobs than at any time in the last decade and a half.  Although some prices remain stubbornly high; inflation is down significantly.  Inasmuch as federal largess under both Trump and Biden contributed to the expansion of the money supply Trump now shoulders the burden to reduce the cost of my groceries.  Fair is fair. 

December delivered an overall blowout jobs report and wages are up and continuing to rise, all the while unemployment is at levels before the COVID shitshow hit the fan.  Domestic energy production of crude oil and natural gas are at record levels and we are now the global leader in production and export of crude oil.  Meanwhile, a gallon of regular unleaded, around here anyway, will set you back less than $2.50.  We are awash in an embarrassment of energy and production.

Nevertheless, it goes beyond the economy.  Illegal immigration is belatedly, but at long last down and we've found ourselves with the lowest violent crime rates in fifty years.  No American military forces are in a hot war elsewhere in the world and Trump's go-to Gold Standard for how he's doing - the stock market has set a new record for the past two years.  Finally, Americans have shown signs of coming around to actually recognizing and accepting the reality that conditions on the ground are pretty darn good.   

I'll bet you a steak dinner that in reasonably short order President Trump will take credit for the strong economy he is about to inherit.  That's because as I gaze across my landscape I don't see a hellscape; I see prosperity and the best economy on the planet.  If you think I'm making this up out of thin air; fight me.

Do not get the impression I am diminishing the reality that not each and every single last American, shares the same upwardly economic prosperity and living conditions.  Poor people and economically disadvantaged families are real.  Nor am I blind to politics.  It is certainly in Trump's self-interests to paint as bleak a landscape a possible for his base.  Nothing new under the sun there.

As Trump assumes office there are no shortage of challenges ahead.  Russia, China and Iran are failing states.  Russian and North Korean military personnel allegedly execute Korean wounded to erase evidence of North Korean involvement in the war against Ukraine. Ugh.

Here at home, domestic terrorism has, again, reared its head.  There is funding the budget and passage of a reconciliation bill, the DOGE, the debt ceiling, tax policy, Social Security and Medicare.  Will there be a comprehensive immigration policy?   99 cent a dozen eggs?

Placing a higher value on action I try to tune-out the talk.  Consequently, I'm looking forward to detailed policy to materialize.  You know, policies which will improve your and my prosperity and general lot in life.  And maybe make the world a safer place.

Donald Trump has been dealt a solidly good hand and I'm looking forward to being witness to how he plays it.

Bring it on.....

Just The Facts Ma'am

With all due regard and respect for Dragnet's Joe Friday, Thursday evening's debate was rife with inaccuracies.  I'm not talking about the typical election year hyperbole; I'm talking about intentional mistruths and outright lies.

A couple of the whoppers that stand out include:

We have a thousand millionaires in America, I mean billionaires.  And what's happening?  They're in a situation where they in fact pay 8.2 percent taxes.

- Biden

Pants on fire!  Biden is referencing a 2021 White House study concluding that the 400 wealthiest taxpayers paid an effective tax rate of 8 percent. 

Because the estimate included unrealized capital gains in the calculation the resulting effective tax rate is fallacious.  Smoke and mirrors wrong. A deception.  That is not the way the tax code works in real life.

People are taxed on capital gains only when the asset (stock, real estate, business, whatever) is sold.

According to the IRS, the top 1 percent of taxpayers (defined as income of $548,000 and up) paid taxes averaging 26%.

 

He's destroying Medicare because all of these people are coming in.  They're putting them on Medicare.  They're putting them on Social Security.  They're going to destroy Social Security.  This man is going to single-handedly destroy Social Security.

- Trump

Some of you readers may recall my own experience with applying for Medicare the summer of 2020.

My application for coverage was declined.

Yup.  Because I happen to have been born in another country; Germany in-fact.  No matter that I have been paying into the system forever and hold a valid US passport. The Social Security Administration had me classified as a non-citizen.  I was undocumented and therefore ineligible.  I can only speculate; but this was likely a bureaucratic record-keeping holdover traced to my registration for the draft in the very early 1970s.  The local draft board was somehow convinced that because I held both a US Army birth certificate and a German birth certificate my dual citizenship would entice me to flee the country and thereby circumvent any attempt at conscription and free trip to Vietnam. The fix was I had to renounce any claim to German citizenship.  After I raised my right hand and swore an oath to absolutely and entirely renounce and abjure all allegiance and fidelity to any foreign prince, potentate, state, or sovereignty, of whom or which I have heretofore been a subject or citizen, I was issued a Certificate of Naturalization.  As a sole citizen of the US of A my draft-dodging moment was over.  

The people over at the Social Security Administration eventually cleared-up any confusion over my citizenship status and I am covered by both Medicare and Social Security.  Happy ending to a stressful three months.

Donald Trump is a liar.  And this lie is a howler.  Sure, I know his followers believe this BS but the truth of the matter is that undocumented individuals are ineligible for both Social Security and Medicare.  

That a dazed and confused Joe Biden didn't nail Trump to the wall over this has me stumped.

The entire Thursday event over at CNN was an unparalleled shit show.

Great Expectations

Later today, President Joe Biden and former President Donald Trump will meet face-to-face in a presidential debate. 

There is a lot here that's going to be different, starting with the fact that this is happening in June, months before the election and months ahead of when presidential candidates normally meet for debates. The debate is also being put on by CNN, not the Commission on Presidential Debates that has stuck to down-the-middle traditional formats for decades.

When viewers tune-in this evening there is going to be endless speculation about the health and cognition of Presidents Biden and Trump.  Supporters of either (or neither) are going to hang on every nuanced shred of evidence supporting something that the candidates aren't sharing with us.

Whatever points or arguments that the candidates make may be beside the point as viewers parse each and every word or syllable to support their biases concerning the physical and cognitive fitness of a couple of octogenarians.

These guys are old.

Nonetheless, this debate is important to setting the stage for the run-up to the election in November.  I'll be watching with a glass of Merlot and a big bowl of popcorn.  If I had my druthers I'd ask these guys to explain to me how old is too old; and how unhealthy is too unhealthy.  Along with a big dose of policy proscriptions on top.

This blogger can't wait to see who shows-up for the show.  I have great expectations of both candidates.

Inflation

I have reached the end of my rope.  My patience with the economic condition is not a bottomless reservoir of hope.  This is an outrage and further evidence that the administration has lost the reins on this runaway inflation.  Something needs to be done.

Gram for gram, the white truffle has now become one of the most expensive delicacies on the planet. 

 

In Italy, fresh white truffles run as high as 4,500 euros per kilogram (or nearly $2,200 per pound), according to Coldiretti, Italy’s biggest agricultural trade group. 

 

Once they are shaved onto a plate of risotto or roast quail in the finest restaurants in the world, the price will multiply again, underscoring their “white gold” reputation. 

 

Closer to home, at Acquerello in San Francisco, there is a $495 truffle tasting menu (excluding wine and tax). Trufflephiles in London and Dubai can expect a similarly pricey restaurant tab.  Sky-high prices will be the norm, truffle experts say.

 

At an auction in Alba, Italy, a one-and-a-half-pound specimen fetched a record price of €184,000 (nearly $200,000). Bidders are set to converge on Italy’s truffle capital on Sunday to do it all over again.

 

Another Biden fail.

 

Sunday Morning Update - And An Insight

Good morning.

Another day has dawned and as of last evening it would appear that we have a debt ceiling agreement.  To be sure, the agreement to avert a default now heads to congress; where its passage is clearly uncertain.  Speaker McCarthy continues to be bedeviled by troublemakers who may revolt.  As a consequence the Kabuki Dance and its theatrical drama persists.

I'd like to share some insights from Peter Zeihan, geopolitical analyst and author.  I follow him closely in my retirement journey to better understand the impacts of financial, cultural, political and military events.  

Zeihan's observations on the debt ceiling generally jibe with my own.  Namely, after threatening a sufficient amount a unwarranted self-sabotage an agreement will materialize at the last moment.  Fingers-crossed that we've correctly predicted the outcome.

The US is one of the few nations that imposes a hard cap on public borrowing.  And this is not the first time a political party has sought to weaponize a threat of default as a means of extracting budget concessions that should belong in appropriations negotiations.  Unless the system changes it won't be the last.

For the present, the Democrats have accused their Republican colleagues of cynically using the mechanism to damage Biden going into the 2024 election cycle and to slash spending that they would likely struggle to pass into law.

Of course, when under recent Republican rule, total debt under Trump increased by $8 trillion.  That is a whopping one-fifth (20%) of the entire total.  In all fairness, there was a COVID response back then and $4 trillion was added by Biden so there is plenty of blame to go around.

This is all just political theater; but it has gone a bit further than usual.  What I wanted to share is that Zeihan has pulled the lamp cord on my light bulb casting more light and added clarity for independents, center-right individuals and conservatives who have found themselves wandering in exile for the last seven or so years.

Zeihan reminds his viewers that we're going thru a period of political transition - something that occurs every couple of decades.  And when that happens the factions that make up the parties move around.  They jump ship, maybe they become swing voters or they might switch sides.  The stage that we're at in the moment is one where the fiscal and business conservatives have been banished from the Republican coalition while at the same time the MAGA movement has attracted significant union and populist support from the Democrats.  It is messy.

Between the unions, fiscal and business conservatives all transitioning, when it comes to the debt ceiling there's no one around to knock some sense into other fringe groups more willing to play with matches.

So, there you have it.  When I tell you:  It isn't my daddy's Republican party anymore. It is because it isn't.  The GOP has been undergoing fundamental changes since the onset of the tea party movement.  Donald Trump's trouncing of the Republican establishment in 2016 and his continued popularity among his base exposes the weakness of the laissez-faire economic approach known as Reaganism.  Reagan Republicans and Neo-conservatives who believe in limited government, free trade, fiscal responsibility, a muscular foreign policy and staying out of the people's personal lives need not apply.  Cancel your Chamber of Commerce membership.  You are persona non grata.

Being an old guy and set in my ways my cohort of like-minded individuals has little tolerance for performative politics.  So if you want to have a meltdown over a rainbow windsock on sale at Target that's your business.  It isn't going to add to the prosperity of my country, security domestically or abroad, secure the border or fix the systemic problems of our shaky entitlement programs.  It's basically a bullshit party platform.

While it sucks periodically to reflect on having outgrown my usefulness I'm satisfied to watch from the sidelines until the wheels come off.  I may be obsolete, but this old guy isn't gonna die on Culture War Hill.  I'm gonna enjoy the show.

The gist of what I outline above starts just before the two minute mark.  But watch the entire thing.  It's a short four minutes.  Thanks, Peter for helping me navigate this.  And a Hat Tip to Braumeister for the initial recommendation many years ago.....

Sunday Morning Gorilla

Sure, you're probably thinking I'm going to launch into another rant or diatribe about the 800 pound gorilla sitting in our respective sitting rooms.  No rant this morning.  Just a few factual observations; the first of which is that Trump and now Biden have avoided addressing the primary cause of our budget woes. 

When I tapped-out this post a couple of days ago It was basically impossible to read, view or listen to any media outlet without a reminder about the debt ceiling debate.

To be clear, this is a scary subject inasmuch as while our country has sufficient income to pay the interest on our debt (the bondholders) we also have a $1.5 trillion shortfall in 2023 to pay for all of the previous spending authorized by all the previous congresses and signed into law by all of the previous presidents.  From a purely technical perspective this isn't about a budget - this is about paying for the spending that we're already on the hook for.

That said, there is now a parallel discussion about the budget; which is a positive development.  Appropriations is where this discussion belongs; the debt ceiling is about paying for past obligations.  Yet make no mistake, unless the ceiling is raised we will have insufficient funds to pay for all of our lawful obligations including Social Security, Medicare and Medicaid.

Between you and me I don't believe there will be a default.  Anyone holding an IOU (government bond) will collect their interest on time and congress and the president will agree on some sort of scheme to address discretionary spending.  There is a high probability congress will convene some sort of Blue Ribbon Committee to study a weight loss plan for the 800 pound gorilla.  Of course I am notoriously famous for my bad predictions and while Kevin McCarthy is legislating he is bedeviled by a small number of crackpot members of his caucus who love outrageous tweets, reckless and inflammatory rhetoric and generally performative politics.  Just like the congressional nutjobs who extol the virtuousness of Vladimir Putin, they're cuckoo.  Why is it that some people elected to congress spout such outrageous  foolishness?  Is this a mechanism to fund raise?  Or a means to draw attention on cable programming?  Suck all the oxygen from the room?  Childish attention-getting behavior?  It's stupid, I'll never understand it and I digress.

We have a debt limit problem inasmuch as we continually borrow to make ends meet.  And the fundamental driver of our spending has been the growth of Social Security, Medicare and Medicaid.  Insufficiently funded, this leads to borrowing. This is the 800 pound gorilla.   Does it strike you as strange that neither Trump or Biden could be bothered  to acknowledge this?  You know who has talked about it?  Governor DeSantis.  But I digress. 

Source: Office of Management and Budget, 05.16.23

Consider this, in 2023 those three items will for the first time, will account for more than one-half of the entirety of the federal budget.  Furthermore, these three items account for just shy of 11% of our Gross Domestic Product (GDP).  In three decades this is projected to rise to 15% of our GDP. 

If you do the math the issue in our living room is we are presently borrowing to pay for an 800 pound gorilla today that could  grow to a 1200 pound gorilla in the years to come.  Creating a King Kong is not sustainable.

So, instead of fabricating a crisis and potential self-inflicted wound over paying for stuff that all of the foregoing congresses and presidents have passed into law we need to be holding a serious discussion about how we reform the largest programs in the budget.  Truthfully, the very best opportunity to reform our entitlement programs is when we enjoy rare periods of divided government.  Like right now.

No amount of shrinking the IRS, defunding the FBI, or clawing-back of COVID relief funds is going to plug a $1.5 trillion shortfall.  This is not rocket science.  This is simple math. 

While a handful of coconut congressional troublemakers might delight in gleefully blowing-up the economy, tanking the stock market, spiking our future borrowing costs and destroying everyone's carefully-built retirement plan with a default; I'm going to keep my eye on any serious zookeepers in congress and maybe a president who might take a stab at taming the growth of the gorilla and keep this country on a steady path of economic growth.  Yes, virtually every indicator supports the notion that the economy is presently doing quite well. Let's stipulate that too much debt can kill the economy. But that is another discussion for another day. 

This blogger isn't going to hold his breath over entitlement reform.  As it doesn't stand a chance of happening until after the 2024 election and we know who's in-charge of congress and the white house.

Until then, it appears that we've got bullshit culture wars to fight.  So, grab a cold bottle of Bud Light to assuage any festering election denial and my serious-bad predictions.

Whistling past the grave yard.

Sunday Morning Economics - Debt Ceiling Simplified

It is factual to say the our burgeoning federal debt is a consequence of budget choices made by both Democrats and Republicans.  It has been a bipartisan endeavor to borrow money to finance expanded federal spending, underwrite the indirect costs of tax cuts, maintain social safety nets and expand assistance during recessions.  It is an oversimplification to suggest that growth in spending is the sole domain of Democrats or cutting taxes is the sole domain of Republicans.  

Democrats and Republicans mutually engage in both pursuits.  

Recent history suggests that the largest drivers of our accumulation of debt has been the federal response to the economic downturns of the 2008 financial crisis and the 2020 pandemic crisis.

You may recall that when Obama took office in 2009 he inherited a recession from Bush.  In response, he persuaded Congress to authorize $787 billion in stimulus spending and tax cuts.  Safety-net spending continued at higher levels over the ext few years as the economy slowly rebounded.

After COVID spread across the globe in 2020 leaving floundering economies everywhere in its wake Trump persuaded Congress to authorize a much larger aid package exceeding $3 trillion.

Biden ascended to office in 2021 and signed into law an additional $1.9 trillion in stimulus.

It would be fair to question the efficacy of individual components of all of the foregoing.  Both parties continue their finger-pointing.  And economists disagree amongst themselves.  Nevertheless, there is general agreement that in the face of a serious economic decline federal spending (and its resultant borrowing) to protect citizens, businesses and stimulate the economy is a good thing.

There is also general agreement - amongst economists anyway - that recent inflationary pressures can be laid at the feet of flooding the economy with all of that liquidity.  But I digress.

So, is it a small matter to assign blame to individual parties or administrations for the debt?  Of course not.  Like I said at the outset this is bipartisan.  The deficit increased by roughly $12.7 trillion under the administrations of Bush and Trump.  And an additional $13 trillion under the administrations of Obama and Biden (so-far).

Of course, these are simply the raw numbers and do not account for the deficit impacts of policy decisions that persist for many years after presidents depart.  Nor does it address the fundamental principle of matching spending with revenue.  In years of extraordinary spending demands my own household may exceed its revenue resources.  But subsidizing a lifestyle solely with borrowing is reckless and fraught financial planning. 

The important thing to remember is that we got here largely as a consequence of the actions of the four most recent administrations.  As you witness the current drama remain mindful that any newfound spine for deficit spending is coming from many of the same members of Congress who sat idly by and with nary a whimper raised the debt limit three times while the former guy was in office. 

Sure, they want to blame everything on the current guy.  That is theatrics and politics.  I get it.

I'll conclude this post with an observation and admonition.  Failing to raise the debt limit does nothing to control spending for the simple reason that the money has already been spent.  Getting your undies in a knot for all the stuff they've already bought doesn't do anything to stop Congress from spending the money from the get-go.  It may keep your base in a near-state of constant agitation and near-erotic arousal but when you pick it apart it's conflated virtue-signaling.  Sure, I admit to being raised in a simpler time; but I learned this:

Paying your bills is virtuous.

Playing with dynamite is dangerous.

You're welcome.

And stay-tuned.....

Tall Tale

Just the other day President Biden claimed in both a tweet and in a speech that the recent CHIPS bill would create one million construction jobs.

Whoa!

According to the a report issued by the Semiconductor Industry Association the government's  $50 billion expenditure is likely to create something on the order of an additional 6,000 construction jobs.

Details here.

Lousy Economic Policy

You are deluding yourself if you think the officially-called Inflation Reduction Act (signed into law only a few moments ago) is actually going to reduce inflation.  

Inflation is a monetary phenomenon.  

The bill isn’t going to have any noticeable impact at all.

What's-Up With The Price At The Pump?

Greetings!

I bring you glad tidings of supply-demand economics and an admonition to steer clear of magical, wishful thinking and disinformation found in the Face Book cesspool of lazy economic thought.  

Consider the cost of a gallon of petrol nowadays – $4.64 at the Shell station in Sturgeon Bay yesterday.  That's come down a bit lately, yet remains almost a couple of bucks higher than what it was a year ago.  Filling your tank is even costlier in some parts of the country (be grateful you do not live in LA County).  

On Face Book it is frequently implied that our presidents establish the price of gasoline. I wonder - is there a big switch in the White House basement bunker that POTUS flips to peg the price at the pump?  We all know that isn't true.  Here at least.  

It was true in a place we call Venezuela.  This country happens to be a major oil-producing nation and the government subsidized the price of gasoline (and a lot of other things) to curry favor with the populace.  But I think we all know how that socialist worker paradise turned-out.  Sadly, a nation awash in oil and the entire shebang collapsed.  The lesson is to be careful what you ask for.  But I digress.

I understand that economics is sometimes hard to wrap your mind-around.  Back when I had a day job as a wealth manager and trusted financial advisor I made a very good living making complicated economic and financial subject matter understandable for the average person.  Here’s a simple explanation to keep the facts straight.  

There are only a handful of contributors to the price of a gallon of gasoline – with the largest contributor being crude-oil prices. Presently at 60% - the largest driver of the cost of a gallon of gasoline is the price of crude oil.  This is compared to 25% in April of 2020.  My recollection is that this was when the pandemic crushed the cost of crude as demand fell along with that of other goods and commodities.   

 

Other contributors to the cost of a gallon of gasoline include (in this order) refining, state and federal taxes and distribution and marketing. 

Crude oil is a dollar-denominated commodity that trades on the global market.  The price of crude is considerably higher today than a year ago and higher still than two years ago. So, if you’re pining for the days of yore when gas was really cheap you need to consider your willingness to revisit a period of Covid restrictions, lock downs, a global collapse of travel, tens of millions of unemployed and a tanking economy that contributed to the collapse of crude oil prices. My recollection of that hot mess is still quite fresh and I want nothing to do with it.

 

Complicating matters is the Russian invasion of Ukraine.  On their own, wars generally rattle commodity markets.  As a major oil producer the economic sanctions placed on Russia have further sent more than a few shock waves thru the energy markets.

 

Finally, the OPEC+ nations have deliberately kept their production levels at, or close to, the levels negotiated by the Trump Administration  a couple of years ago.  This was done to rescue our own domestic oil producers staggered by the drop in oil prices.  If OPEC increased production (supply) prices would likely drop.  The Biden Administration is going to pay a call on the Saudis to see if hearts and minds might change on the matter of increased production.  Good luck with that.  If I was a member of an exceedingly profitable cartel I'd be disinclined.  Time will tell.

 

Enough said about the cost of crude.      

 

The second contributor to the recent rise in gasoline prices is growing demand as workers have returned to the office, resumed daily commutes and a weary population embraces a post-Covid world and is traveling.  We embarked-upon a marathon road trip in April and while I didn't particularly care for the high price of gasoline the Missus and I really didn't give a rat's ass.  We had places to go and people to see.  We also caught Covid - but I digress, again.

 

Just this past Friday I had to go to town to run an errand and I was witness to an extended wait to cross the four lane highway.  The northbound traffic was a solid and seemingly endless parade of campers, trailers, boats, kayaks, car-top carriers, bike racks and travelers sporting out-of-town vehicle tags. While some of you readers may have grumbled over the wait; I saw room taxes, vacation spending, restaurant meals and winery visits.  All of it principally fueled by an increased demand for gasoline.  Don't take my word for it though tourism trade on the peninsula continues to set new records for visitor taxes.

 

If you were to talk to the people over at AAA they would tell you that the post-Covid pent-up demand of American motorists continues to set record highs.  And with no slack in fuel consumption (get ready for this) demand is going to keep gasoline prices elevated.  

 

The question of the day is this: Have you curtailed your vehicular use as a consequence of the price at the pump?  I haven't.  And most of my contemporaries haven't either.  Welcome to the demand side of the economic equation.

 

The third (and smallest) contributor to rising prices is another of those nagging supply-chain issues.  Gasoline inventories are ample at the present moment - although refinery capacity struggles from time-to-time.  

 

Addressing one last bit of FB chicanery is that the price at the pump has nothing to do with canceling the permits for the Keystone XL pipeline.  The second Keystone pipeline. That project was conceived by a Canadian company to move low-grade tar sand crude to the gulf coast for export overseas.  And after more than a decade of controversy wasn't even slated for completion until sometime late in 2023.  As a general rule gasoline is not refined from tar sands due to the extraordinary costs.  Besides, the first Keystone pipeline has delivered over 3.3 billion barrels of crude oil since 2010.  It was never shut-down and continues to meet domestic and global energy needs.  To be clear, Biden energy policy might have a long term impact on energy prices.  Presidents can, and do, impact energy costs over the long term by means of policy.  Biden hasn't done much of anything anyway and when the GOP regains control of congress he's stuck.  For the present, current pricing is impacted principally by the global market price of crude and strong consumer demand. 

One final thought. There is a silver lining here if you look for it. Plenty of our countrymen work in the oil patch. A couple of years ago petroleum engineers and refinery workers were being furloughed in record numbers. Today domestic producers have recovered and are humming-along trying to keep-up with demand. That’s a good thing and a contributor to a healthy economy.  And for us retirees who belong to the investor class - energy and related shares are rocking the nest egg.

I don't want to minimize the reality that energy executives are loath to increase production (supply) while they are reaping record profits.  Their duty is to shareholders and employees first.  Markets drive pricing.  That's how business works in a capitalist economy. 

Raising a toast to the 2022 road trip wherever it may take you.

 

Bonus:

 

The Ukraine War, a New Flashpoint and the End of Europe's Energy Innocence

 

Energy Independent?

A funny thing happened on the way to the FB page in the last couple of days. There has been a marked increase in chatter about how Donald Trump made us energy independent and how Joe Biden erased it. Once again I am reminded that FB is a fertile petri dish for lazy partisan economic thought. And Zuckerberg doesn’t much care about which side of partisan divide you dwell. It’s all click bait. *Disclaimer: I own FB stock. Please, PUHLEASE, click to your heart’s content.

 

I spent almost four decades making arcane economic concepts easy for lay-people to grasp and understand. I was good at it, built a successful investment advisory business, made a lot of friends and retired. I am told I even saved a marriage. My business partners continue the line of succession today along with the fourth generation of many of the very first clients. But I digress. The point of this post is that if I had clouded my professional judgment and advice with partisan rancor I would have been out of business in fairly short order. So I am going to put my advisor hat back on for a spell as this is the stuff retired financial silverbacks love to expound-upon. It’s free too as I’m no longer licensed to bill you for it. You can stop here or choose to keep reading. You pick. I recommend you share this with your own trusted financial advisor for a second opinion. Indulge me the access to your valuable bandwidth.

 

The truth of the matter is that in the natural order of the oil business we import oil from other countries each and every day. Unlike rare art works or collectibles oil is a fungible global commodity. It is universally interchangeable and trades freely between willing buyers and willing sellers. If we import a million barrels of oil and export a million barrels of oil our net dependence or independence remains unchanged. Nobody will give a tinker’s damn.

 

It is a fact that in 2019 the net imports for crude oil flipped from positive to negative. By that measure alone (excluding natural gas, coal and renewables), we became “energy independent” insofar as oil consumption is measured. Donald Trump was president when this happened for the first time in October 2019.

 

This trend towards independence began under George Bush II, continued under Barack Obama, Donald Trump and now Joe Biden. The policies of the former and current presidents bear no direct responsibility for this trend.

 

Hydraulic fracking is responsible for this. Yup, fracking.

 

It is instructive to know that it was under Obama that legislation was passed into law allowing producers to sell crude oil for export. Heretofore, only refined products like gasoline or diesel and kerosene could be exported. Opening-up the markets for domestic producers of crude oil was a pretty big deal as it allowed access to global consumers for front line drillers and not just refiners. This both extended and expanded the fracking boom.

 

It is no great secret that Biden has embraced policy that could negatively impact domestic oil supplies in the future. However, the surge in pricing that we were witness-to last year was largely a consequence of a COVID-induced drop in production (supply) that began in the spring of 2020 long before Trump left office. The 2020 drop in production was initially five percent. In the eyes of most people 5% might not seem like much but it happens to be more than three million barrels per day (BPD). Consumption (demand) during the pandemic recession declined by 3% and as a consequence our energy independence began to shrink.

 

So, the short answer is that we maintained a margin of energy independence (albeit smaller) going into 2021. Demand fully recovered last year while production continued to lag with the following result: Smaller Supply + Increased Demand = Higher Prices.

 

By the close of 2021 production reached 11.7 million BPD. While this was still a million BPD below 2019 levels it was a million BPD higher than levels at the close of 2020. This was evidence of a recovery.

 

As further evidence of a turnabout the number of rotary oil rigs began to recover. At the close of 2019 there were approximately 700 operational domestic rigs. In 2020, that number had fallen somewhere below 200. Oil field services giant Baker Hughes recently reported that the rig count has rebounded to close to 500. As a leading indicator of the strength of the domestic oil business a recovering rig count is exceedingly encouraging.

 

So where does that leave us?

 

At the beginning of the year I blogged about this and my expectation was that as the supply/demand gap closed between production and consumption our independence would recover and consumer prices would moderate.

 

The good news is that according to the US Energy Information Administration  and data just in within the past week; we continue to remain net negative (independent) with regard to imported oil. 

 

 

Does this mean we do not import oil? 

 

Nope. As I pointed out in the third paragraph (above) the nature of the oil business is that you always import oil. The important end-result is net negative. And for the record most of our imported crude comes from our friendly neighbors to the north. Our neighbors also export refreshing Canadian lager to US markets but that is an altogether different discussion.

 

The net negative situation is a good thing as this “independence” most importantly protects us from supply shocks. Furthermore, we retain profits here and they do not go to vain and unholy middle eastern despot kingdoms. Instead they contribute to our own GDP and US prosperity. When energy prices go up it is domestic producers of crude oil, their workers and oil patch states like Texas, North Dakota, New Mexico, Oklahoma, Colorado and Alaska that are winners. This is a good thing.

 

Yet let’s be clear; energy independence as described here does not magically translate to low prices. Anybody that tells you otherwise is peddling economic pornography or hocus-pocus. Go back to paragraph three (above) and be reminded that oil is a globally-traded commodity and is freely-priced. Like all global commodities it is subject to price shocks as a consequence of geopolitical events.

 

No president of any party has the ability to dial-up or dial-down commodity prices any more than they have the power to fix the price of a share of Apple stock. Don’t take my word for it though; Hugo Chavez tried that years ago and look where it got Venezuela. A vast failed socialist state.

 

If energy prices spike as a result of war and the disruption of European energy supplies it will likely not have outsize influence on our longer term overall growth. Nevertheless, you and I will not be happy with the price at the pump. And Old Joe Biden will be blamed for this.

 

Because that’s the way politics works, not the way market economics works.

 

PS – If anyone wants to blame any of this on shutting down Keystone XL – fight me.

 

Energy Independent?

I am witness from time-to-time of individuals who state a belief that the Former Guy made us energy independent, and now under the Current Guy we have somehow immediately lost that energy independence.

To be clear, presidents cannot and do not decree energy prices, production, dependence or independence. Global markets and supply demand forces are responsible for this. That said, I know that most of you reading this want easy answers to complex subjects. I get it. And the easy answer is to point to the Current Guy's hostility to the oil and gas industry and say: See. It’s all his fault! The actual answer is more complicated. Allow me the opportunity to explain.

First, a few words about what constitutes energy independence – something that most individuals see only through the lens of oil and natural gas. A more accurate view would be to account for all of our domestic energy production; oil, natural gas and coal and renewables. Then subtract our net energy consumption. If you only consider oil and natural gas those sources represent only 68% of our energy consumption. Thus, if you observe our net exports going positive the conclusion is energy independence. If our net exports go negative the conclusion is dependence.

The truth of the matter is because oil is a fungible global commodity we import oil from other countries each and every day in the natural order of the oil business. That reality is not going to go away. All that matters is if we import a million barrels of oil and export a million barrels of finished product our independence is basically unaffected.

It is a fact that in 2019 the net imports for both crude oil and finished products flipped from positive to negative. By that measure alone, we became energy independent insofar as oil consumption is measured. The Former Guy was president when this happened for the first time in October 2019. 

Second, if you look at the chart (above) the trend towards independence began under the Former Former Guy. Alas, the policies of the two prior presidents bear no responsibility for that trend.  Neither of them get credit.  Hydraulic fracking is responsible for this.

Nevertheless, it was under the Former Former Guy that legislation was passed into law allowing producers to sell crude oil for export. Heretofore, only refined products like gasoline and diesel could be exported. Opening-up the markets for domestic producers extended the fracking boom benefiting front line producers and not just refiners.

Lastly, it is a fact that the Current Guy has embraced policy that could negatively impact domestic oil supplies in the future. However, the surge in pricing that we are witness-to today is largely a consequence of a COVID-induced drop in production (supply) that began in the spring of 2020 long before the Former Guy left office. The 2020 drop in production was 5%. That happens to be a drop of more than three million barrels per day. It has not yet recovered. And while consumption (demand) during the pandemic recession initially declined by 3% our energy independence began to shrink.

So, the short answer is that we maintained a margin of energy independence (albeit smaller) going into 2021. And since then demand has fully recovered and we now find ourselves with this: Smaller Supply + Increased Demand = Higher Prices.

The final answer to the energy independence question won't be known until all the data is in for the full year of 2021.  Then we will know we've lost our energy independence for the year. I’m not being a smart-ass but if it hasn’t it will largely be a consequence of domestic oil and gas production continuing to lag pre-COVID levels. As the gap closes and production more closely matches the demand needs of a recovering economy our fleeting dalliance with independence will likely return and consumer prices will moderate. That is my expectation.

 

Let's Go Brandon

It’s perfectly OK to disagree with Joe Biden’s politics.  Or even dislike the man.  Everyone is entitled to an opinion and a belief system - political and otherwise.  Heck, Uncle Joe may even go down in history as a failed president. 

All of that aside, I encountered this when I ran an errand the other day.  It is obvious to the casual observer that the individual who hung these on their porch considers it a bold expression of their First Amendment rights.  

Congress shall make no law... abridging freedom of speech.

We all have a constitutional right to say bad things about whoever is the occupant of the White House.

Nevertheless, the owner of these banners is not a patriot and hopefully doesn't have children or grandchildren.

Let's be clear- I have a rather thick skin when it comes to matters that might irritate anybody's delicate sensibilities. 

 

If you want to say F*** you to the current guy; or the former guy, have at it.  You won't be the first and you won't be the last.  It's a free country.  What makes America great is we have the right to say bad things about the President.  In the interest of full disclosure I have told any number of lame politicians to F*** off over my lifetime.  

 

However, in the privacy of my own personal space - not with a dishonorable banner hanging on my porch.  

 

I consider this display of opinion ineffective on two levels.  

 

First, it is a desecration of the flag and consequently it dishonors the women and men that laid-down their lives or otherwise served to defend and uphold the values and ideals represented by the flag of this great nation.  Alas, in a world where it is acceptable behavior to grab someone’s mother, wife, daughter or granddaughter by the pussy perhaps this is what now passes as patriotism.  I think it is crass.

 

When you superimpose our flag with the F-BOMB and pass-it-off as some sort of smart-ass patriotic expression you lose anybody that has a normal view of right from wrong and what is righteous and noble about what this country stands-for.

Second, when you flaunt your tasteless desecration in public for the consumption and questioning of young and impressionable children you are setting a bad example.  

 

Is this what we want our children to model in their formative behavior? 

 

If you want to desecrate the flag keep it in your own personal living space for you and your friends to get-off.  Flaunting it in public doesn't work.

 

And the simple reason is that normal people aren't going to take you seriously and nobody places any value on bad manners and poor role models.  

______________________________________________________________________________ 

There is a population of conservative, center-right and independent-minded voters who place a high value on facts and the truth. Marginalized because they do not demonstrate sufficient fealty and obeisance to the former guy - exile is their cross to bear.

 

Economics 101 and the Impact on Rising Gas Prices

As a recovering financial guy I am both bemused and chagrined on nearly a daily basis by the abundance of delusional and wrong-headed economic thinking (much of it magically wishful) that seems to fill every corner of social media as it relates to the subject of rising gasoline prices. 

It is apparent to me that confirmation bias has replaced Economics 101 as vast numbers of disaffected people pine for the return of the low oil prices of a year ago.  Perhaps they have forgotten this so I want to be absolutely clear -  the price of crude oil and gasoline tanked a year ago as the impact of the pandemic laid waste to the global economy AND PEOPLE STOPPED TRAVELING.  The truth of the matter is that demand fell off of a cliff.

Fast forward to today - a recovering economy is heralded with a rise of gasoline prices.

The price of crude drives two-thirds of the cost of a gallon of gasoline. The balance is refining, distribution, taxes, marketing and demand. 

On the demand side of the equation the increasing strong demand for gasoline (and other petroleum-based products) places pressure on the supply.  Basic economics dictates that as demand increases and supply remains static the higher demand leads to a higher equilibrium price.  And vice versa.

        

      Click on the image for a closer look at the graph

 

As individual consumers, higher prices at the pump means that some of us will have less money in our household budgets to spend on other goods and services.  As a consequence higher gasoline prices have an effect on the overall economy.  Nevertheless, high gas prices are a principal sign of a strong economy.  If you remember nothing else – remember that. 

If you want to forget something you can dispel the notion that Presidents Trump and Biden determine gasoline prices. 

That is not only lazy thinking - it is silly.