You have one job this week. Watch oil and Bitcoin [BTC].
Let’s take oil first. Last week the main international contract — Brent crude — settled at US$119 a barrel.
I don’t think it’s an exaggeration to say that the fate of the markets depends on if oil rises or falls from here.
It’s simply not possible to get inflation down to a reasonable level if oil doesn’t pull back.
And the only way central banks can walk down their recent ‘hawkishness’ is if inflation looks like cooling off later in the year.
Let’s look at one part of that argument…
A colleague of mine in the US says three components that drove the inflation surge are car prices, housing, and labour.
The semiconductor (‘chips’) industry went into shortage and made car production problematic, sending car prices soaring. This chip situation appears to be stabilising.
Higher mortgage rates are dampening demand in the US. OK.
And now we have evidence from Wall Street that firms are beginning to lay-off workers because there’s now some slack in demand. Maybe.
I’m still not convinced any of these seal the deal.
Go to the top line to see why.
Oil is a whisker away from breaking out into massive new highs if demand continues as is. It trumps all of the above if that’s the case.
It’s man versus machine here, in a way. I’ve seen multiple ‘recession models’ from Bloomberg and the like saying that a recession is unlikely.
But can these models deal with the energy constraints appearing in the real world?
Natural gas in the US is up more than 100% over the last year or two, and thermal coal is up 700% from its 2020 low.
A low cost of energy is vital to economic growth and earnings growth in the stock market.
I can’t help but notice that ASX retail stocks are taking a pounding at the moment.
That seems to be the market pricing in the loss of discretionary spending as energy and petrol costs begin to bite into household budgets.
That, in turn, means we must look at geopolitics to see if the pressure on the energy market can back off. The Ukraine situation doesn’t seem close to a resolution.
And then I saw over the weekend that Iran was messing about with Greek oil tankers.
The last thing the world needs is a flare up in the Middle East with the oil market on an edge like now. It could send oil and inflation skyrocketing.
Perhaps one of the most intriguing aspects of the stock market and energy shares is the UK’s decision to tax the ‘windfall’ profits of oil and gas firms.
The merits of such a move don’t concern us here. But clearly the energy industry’s power of opposition to this kind of thing is much less than what it was.
The shift to net zero means most of their traditional arguments won’t wash.
A high oil price just makes the transition to EVs more compelling. (That’s why I just wrote an issue on what I call potential ‘Tesla Jackpots’. Check it out by starting here.)
You wonder if Saudi Arabia and the leading producers wish oil would fall to make the switch less urgent.
Regardless, it’s threatening to crush the markets now. 2030 and 2050 have to wait on developments.
All in all, it’s enough for me to keep most of my cash on the sidelines. I need more convincing that the recent rally has more legs to go.
What does bitcoin have to say about all this? That’s our second focus for this week.
Bitcoin is notable in that it’s not exhibiting the same strength as the stock market. It’s mired in no man’s land.
That would indicate NOT to trust the current stock market rally.
That might put some of the crypto purists off: bitcoin is supposed to be uncorrelated to everything.
I’m not sure that’s true anymore. It’s possible that it’s now the leading indicator for the markets.
After all, it trades 24/7 and across borders seamlessly: it digests information the fastest.
If it can’t rally, especially when inflation is making traditional fixed asset classes look decidedly ropey, then one wonders what’s holding buyers back.
Put today’s oil and bitcoin numbers down in your diary somewhere. Watch them. If oil goes up and bitcoin goes down, I’m pretty sure I know what’s coming: the ASX back under 7,000.
This could set up a barnstorming opportunity to go shopping for the best stocks on the market.
All the best,
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Callum Newman,
Editor, The Daily Reckoning Australia
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