The calendar looks light but it actually contains some jewels this week

Outlook: The calendar looks light but it actually contains some jewels this week–for Germany, manufacturing orders, industrial production and CPI. We get eurozone GDP on Thursday. In the US, we get CPI on Thursday ahead of the Fed next week. The Fed is supposed to look at its deflator and not CPI, but it can’t avoid seeing it. Forecasts for CPI are centered around 7.9-8.0%, with core about 6.5%. There is a small possibility that (given simply wonderful jobs data) the Fed sounds more hawkish next week because of persisting inflation, and sentiment switches back. It’s too much to hope for that the Fed will say anything–not a single word–about oil and gas prices.

In the US, the focus is on gas prices, something that affects just about everybody. Yesterday Blomberg reported the national average is $3.92/gallon, up 11% from Feb 23, one day before Russia started to invade Ukraine. Expectations are running high that we will see $6-8–or possibly a lot more–before this is over. See the chart. Current prices are already higher than the then-record $3.5150 in June 2008, or $3.4648 from 2011. Two things: prices almost always retreat after hitting a “historic” high. They just do, and nobody really knows why. It could be profit-taking or traders running out of funds to do more, or managers pulling in reins. But then after a pullback and a pause, prices resume. So, where does $6-9 come from? Experience. If gas was about $3.50 before the war, sheer panic can take it to double regardless of stored inventories.

If you want an exercise in frustration, check out the EIA website for “total motor gasoline”. The data is so messy because it includes things like aviation fuel and other issues, but to sum up, we have about 248 billion gallons in motor fuel in storage and we use about 130 billion gallons per day. If this is right, we have no wiggle room at all. Just-in-time management just hit the wall, as in so many other supplies.

The most interesting thing about researching this topic is how little fresh data is available–most of the analyses are out of date. We can get data galore–including from the splendid Statistica–but no new analysis that would help us create forecasts. We do know that the amount of oil we import from Russia is not that much, so even if the US bans Russian imported oil, that will not be the leading cause of US inflation. Tentatively, we suggest that we are simply stockpiling too little. That leads to wondering how much does China stockpile? Ask that question of the EIA, and you get an article from Dec 2018. Various news reports have China adding or subtracting from its strategic stockpile, most recently sales last fall, but we do not have an easily understandable comparison. You can bet the government–the Treasury, the EIA, the Pentagon, the White House–have a clear idea. It would be nice if normal Google searchers could get one, too.

The price of oil is dominating markets today and likely for some time to come, with various Announcement Effects possible–it may not be a one-way street. Natural gas is another issue, with US prices higher but in a stable manner but European prices wildly volatile. The WSJ reports futures contracts for gas in the northwest European market are up 42% over the Friday close to more than €270 per megawatt-hour. “Earlier in the session, prices hit a record high of €345. This very instability is a destabilizing factor for all kinds of economic (and social) factors. The price had never before gone over €200.

We already see forecasts of the European economy falling into the rabbit hole of recession, and a serious one, worse than stagflation. This is a very real possibility… depending on how long the oil crisis lasts. Certainly the US is busily trying to rustle up more supply and we should never downplay the status of the US in such things. Remember the US stepping in to overthrow the Iranian government in the 1950’s at the UK’s behest to put the Shah in power--and take 40% of the oil. Is Mr. Biden as ruthless? Probably not, but his minions may be. And Venezuela is in the same hemisphere. We are not forecasting a solution, just warning that oil prices will not be a one-way street.

Besides, Russia is not winning. What was supposed to be a 3-day war is mired in a 40-mile truck convoy still outside the gates of Kiev nearly two weeks later and Russian soldiers not equipped with fuel or food. In a nutshell, deeply bad logistics. Nobody sees a mutiny but Putin is in the soup. Even the Chief of General Staff of the Armed Forces of Belarus resigned, in part because (according to the Ukrainians), the soldiers refused to join the Russians. Fog of war, indeed.

Trading Notes: As we see in the case of Russian ETFs above, bottom-feeders do exist in wartime. Some of it has nothing to do with fundamental values or forecasting the progress of the war, but rather reading the crowd. When a price goes “too far,” which we identify as breaking bands and channels, we expect a countertrend pullback bounce. To buy euros, for example, in the current environment, is nothing more than some traders judging that the shorts are over-extended and can be intimidated into covering. This means that if you are short and believe in the position, you need awfully wide stops on the upside. At some point the stop is bigger than the likely “normal” range gain, so you bail. This is the psychology of risk management, not fundamentals, and very difficult to judge in chart-reading because there is no “normal” in a war.

That’s the day-to-day problem. If we believe Putin is relentless and there are no circumstances under which he will quit, every negotiation talk or even ceasefire is only an opportunity to double down. The top things to buy and hold are grains, oil and gold. In currencies, it’s commodity currencies, especially those as far away as possible on the other side of the planet–AUD and NZD. If the surefire thing to sell is euros, the top trade would be EUR/AUD and EUR/NZD.

But beware–all of these things are already stretched past their limits. Commodities and currencies are not elastic bands that can break, but remember that opportunists are lurking in the bushes to take advantage of the opposite position, whether triggered by a news event or just on a whim. Any talk of a ceasefire would crash grains, oil and gold. Another source of a crash–let’s say the Biden Administration takes Fareed Zakaria’s advice and lifts sanctions on Venezuela and Iran, letting them sell to the world again, including the US. This is doubtful because “lesser of two evils” is not an operating principle in the Biden world, but imagine anyway. One report has it that US officials met with senior members of Venezuela's Maduro government, presumably to talk about lifting sanctions. But those oil producers cannot simply flip a switch and bingo, oil arrives. But the Announcement Effect would still crash the oil price, even if actual supplies are months away. Another option is pressuring the Saudis, with or without blackmail. This is slightly more plausible. Same effect.

In the old days before instant communications and CNN and social media, it was not beyond the ethics of professional traders to start a rumor to get some counter-trend action. Or to enlarge an authentic event into a bigger crisis than warranted. The most dramatic example was when Reagan was shot, and don’t dismiss it as old-timey stuff that happened 40 years ago. Humans do not change their stripes. We saw several of the same effects during the Trump presidency (tariffs on China), and while the market effect was smaller and the events were true, the commentariat did the same thing–exaggerate effects. If and when there is some kind of respite in the Ukraine war, watch out for the reversal. It’s going to be a humdinger. Bottom line, do not bet the ranch. In fact, pare positions.

Ukraine and the EU: Pres Zelensky applied for membership in the European Union and asked for fast-track consideration. Fast-track means one thing in the US and something else entirely in the EU, where the Turkish application has been languishing since 1999. But EC Pres von der Leyen said "They belong to us. They are one of us and we want them in."

It won’t be easy. Each of the members, 27 at the current count, have to agree. Unanimity is a roadblock, especially when voting yes to Ukraine means, by definition, joining the war. As the FT reports, “Bulgaria is currently blocking accession talks with North Macedonia – and, by extension, with Albania – due to a longstanding dispute involving historical and linguistic grievances. Meanwhile, the other three official candidates – Montenegro, Serbia and Turkey – remain stuck in a negotiation limbo with no breakthrough in sight.” In the case of Ukraine, Spain and Germany have already voiced doubts.

Even if the Commission agrees right away, additional steps include “accession talks, which are divided in 35 chapters grouped in six main clusters: fundamentals; internal markets; competitiveness and inclusive growth; green agenda andsustainable connectivity; resources, agriculture and cohesion; and external relations. The process is strictly linear: each chapter opens only after the previous is definitely closed. Fundamentals, which covers issues such as justice, human rights and public institutions, is the the first chapter to be opened and also the last to be closed, underlining the importance the EU gives to core democratic values.”

Ukraine falls short on a number of points, including the rule of law and “clearly defined borders.” The Copenhagen criteria from 1993 calls for a candidate ot be able to cope with the competitive pressure of a single market. As critics point out, these favor multinational companies over family-owned businesses, especially farms. The negotiating process averages 4-5 years. Even Sweden and Finland took two years. Croatia took eight, and that’s more like it for Ukraine.

The EC could bestow “applicant status” and that would be symbolically nice. It could result in something concrete–money, in the form of Pre-Accession Assistance to help it reach criteria. “IPA's budget for the period 2021-2027 is €14.2 billion and is being distributed among Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, Serbia and Turkey.”

Fun Tidbit: A Russian “entrepreneur” living in the US offered a $1 million bounty to law enforcement officers in Russia to arrest Putin. He put up an old-fashioned US frontier wanted poster that made Facebook take down his post. Here is the text (from Snopes Fact-Checker):

I promise to pay $1,000,000 to the officer(s) who, complying with their constitutional duty, arrest(s) Putin as a war criminal under Russian and international laws. Putin is not the Russian president as he came to power as the result of a special operation of blowing up apartment buildings in Russia, then violated the Constitution by eliminating free elections and murdering his opponents. As an ethnic Russian and a Russia citizen, I see it as my moral duty to facilitate the denazification of Russia. I will continue my assistance to Ukraine in its heroic efforts to withstand the onslaught of Putin’s Orda.

More Fun Tidbits: The crowds protesting Russia’s invasion of Ukraine still amaze. Prague had perhaps the biggest number. We don’t follow social media stuff but apparently a well-forwarded tweet claims a Ukrainian lady downed a Russian drone with a jar of pickles from her balcony. Too wonderful.

And the International Cat Federation (known as FIFe, for Fédération Internationale Féline) posted a statement to its website announcing a ban Russian owned cats. According to Vanity Fair, “FIFe, which calls itself the “United Nations of Cat Federations,” is the parent organization for 42 groups that put on pageants, parades, and competitions for cats in 40 nations. It also hosts the annual World Cat Show, where cats compete in various categories according to breed, along with separate competitions for feline agility. The last event took place in Italy in October 2021, and the next is set for this October in Belgium.”

Note to Readers: There will be no reports this week on Thursday, March 10 or Friday, March 11. Publication will resume on Monday, March 21.

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