Eye On The Market

Arrested Development: the pressure on profit margins, the tightest labor markets in decades and whether “second chance” policies for those with criminal arrest records can expand the labor force

Three topics in this month’s Eye on the Market. First, an update on the Fed, inflation and corporate profits since we believe the June equity market lows may be retested in the fall. Second, a detailed look at what would have to happen for the climate bill’s projected GHG savings to actually occur; the answer matters given the implications for the US natural gas industry. And finally, will all the new IRS agents really stick to auditing taxpayers above $400k? Data from the GAO suggests there may not be enough of them to meet the Administration’s revenue targets.

Topics: A revised map of the United States; investing in equities before a recession; Russia’s natural gas squeeze on Europe leads to another rescue program for Italy; the high cost of pariah status for the oil refining industry

Hydrogen use cases may be much narrower than advertised, and the timeline is a very long one

Fossil fuel bans, heat pumps and electrification of winter heating: What will happen to transmission grids at times of peak loads if no backup heating systems are in place? And what about the pace of change if bans on fossil fuels only apply to new buildings?

The slowdown induced by central bank tightening is just starting. Be patient when adding risk to portfolios. Valuations have declined materially but the price paid for high earnings growth is still elevated.

We continue with two topics on electrification, which is the foundation of many deep decarbonization plans: electric vehicle adoption by gasoline super-users and the transmission quagmire

We start with a summary of the energy landscape, including the energy crisis in Europe, the recovery in the oil & gas sector and a warning label on industrial electrification and carbon sequestration

Surveying the Damage: Russia’s recurring war on Ukraine, equity market declines and the opportunity for bottom-fishing investors, the energy price surge/recession outlook in Europe, the impact of rising metals prices on EV battery costs, the COVID situation in Hong Kong and the latest on ivermectin

The bulk of this note is on China, Russia’s invasion of Ukraine and the surge in natural gas, oil, coal, electricity, wheat, copper, palladium and other prices which will probably drag Europe into recession, and impose a heavy growth drag on the rest of the world as well. But before getting into it, the chart below should hang in the offices of policymakers everywhere. Energy transitions are inherently slow moving, particularly when citizens of countries adopting them erect NIMBY barriers along the way (a topic we cover in this year’s forthcoming energy paper). As we have discussed often, capital spending by the world’s largest energy companies has fallen 75% from peak levels while global demand for oil, gas and coal are all at or above pre-COVID levels. Countries that reduced their supply of thermal energy at a much faster pace than they reduced their demand are paying a very stiff price for that right now. We expect some about-face movements on this in the days ahead.