Pro Perspectives 2/16/21

February 16, 2021

We talked last week about a few things that bubbled up in the news today.

First, we talked about China executing from its post-financial crisis playbook, taking advantage of another global economic crisis, and depressed commodities prices, to hoard commodities

They are doing it.  And today, the FT reports that China thinks it can "hobble" the U.S. defense industry by restricting exports of rare earth materials – of which they control about 80% of the world's rare earth refining capacity.

Remember, the Trump administration flatly called the Chinese Communist Party "the greatest threat to everyone in the free world."   The Biden administration calls the CCP just a cut-throat economic competitor.  The news of the day supports the Trump position, over the Biden position.  And it's clearly very important to be positioned correctly on this. 

Next, we talked last week about the Biden "Clean Energy Revolution" plan on oil prices (and prices in general):  Increased regulation, retrofitting, choking off funding to oil and gas, it's all part of the plan to "stop the worst consequences of climate change" (in the words of the administration).  And they believe these worst consequences to be coming in "nine years."  That's a very precise and aggressive timeline, which means radical change.  

As we've said, we'll be using a lot of oil in the interim.  And with funding for new exploration choked off, foreign oil producers will be in the driver’s seat, and they will command higher prices.  Today, oil traded over $60.  That's up 64% since election day. 

With the above dynamic, get ready for $4 plus gas.  It will be self-fulfilling, and yet it will become the justification for the move to "clean energy" (just as high gas prices were in the Obama era). 

Finally, we've been talking about inflation.  While the Fed claims to ignore the influence of food and energy in their inflation measure, they have a history of acting when oil moves sharply (i.e. oil prices drive inflation).  With that, the interest rate market is beginning to price in the consequences of, not just another massive deficit spending ("aid") package, but also rising oil prices

As oil prices crossed $60 today, the 10-year yield traded to 1.3%.  That's the highest level for the benchmark on market interest rates, since February of last year (pre-pandemic).  This will be the spot to watch.  The speed of the move in interest rates will be key for stability in stocks.