Who Will Win, The Money Printers Or Physics?

Finance U Public Finance U
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Originally published at: https://peakprosperity.com/finance-u-who-will-win-the-money-printers-or-physics/

For some reason, the equity markets in the US, Europe, and Japan are all ignoring the Iran war as if it weren’t relevant to their national economies.

Nothing could be further from the truth. However, Paul Kiker and I are seasoned enough to know that Western financial markets behave, shall we say, buoyantly during wars.

The robust upward price action in Bitcoin confirms that lots and lots of liquidity is suddenly finding its way into the markets. This looks, smells, and acts like liquidity-driven momentum, not a rational assessment of the risks.

If the “markets” were at all rational, they would not be having Japan, Europe, and the US moving in lockstep.

After all, Japan imports 100% of its oil and natural gas needs, while Europe is about halfway along that spectrum, and the US is nearly fully energy independent (at the moment).

In times past, there would have been distinct differences between those equity markets, and currently they are trading in lockstep.

Remember, oil is THE master resource. If you want more economic activity, then what you really want is more oil flowing into and through your economy.

With 10+ million barrels per day missing from the global economy, it’s a sure bet that the economy will shrink in 2026 if the oil flows are not rapidly restored.

Against that backdrop, the projections are for sovereign and corporate debt issuance to hit the second-highest level as a percent of GDP over the past 20 years.

The projections call for 28 trillion of new borrowing, the majority of it ‘sovereign’ (meaning governments) in 2026.

Question: What happens if/when inflation comes roaring back due to wicked high energy prices?

Well, bond prices will fall, meaning bond yields will rise, and stocks will struggle too if history is any guide.

We also discussed:

  • Food & beverage input costs jumped 373 bps to 7.9% YoY in March (driven by diesel/heating oil; fertilizer and plastics still to hit). Yikes!! Corn prices have not yet responded, but farmer input costs (fertilizer = ~40% of corn price) will force higher grain/protein prices later.
  • The stagflation risk is rising: AI-driven layoffs are suppressing wage growth while supply shocks are pushing prices higher. 1970s-style environment likely — equities fell ~50% then despite rising corporate earnings.
  • Historic Energy/Supply Shock Is Underway: The conflict has caused the largest energy disruption on record. Europe faces acute refined-product shortages; global commodities (jet fuel +60%, sulfur +53%, urea +49%, diesel/heating oil +46%) are surging. Markets are pricing the pain as “temporary,” but this is physics (not printable human folly) and will create sequential cost-push inflation.
  • Trump’s Surprising Pivot: Trump stated he now favors higher interest rates to combat inflation (say what??), a sharp reversal from his prior “lower rates or markets collapse” stance.
  • China’s Strategic Preparedness: China holds more strategic crude than the rest of the world combined. Perhaps coincidentally (or maybe not), China just recorded its highest-ever March silver imports (despite flat prices

The bottom line is that Paul is still advising prudence and caution while the cross-currents and competing narratives sort themselves out.

Timestamps

00:00 Market Dynamics Amidst Global Turmoil
18:42 The Shifting Economic Landscape and Inflationary Pressures
45:09 Market Reactions to Geopolitical Events
46:26 Oil Data Insights and European Market Dynamics
50:03 The Impact of Energy Supply on Markets
52:18 Understanding Market Behavior and Risk Management
53:47 The Importance of Energy in Economic Stability
56:42 Current Oil Inventory Trends and Future Implications
59:18 The Role of Algorithms in Market Trading
01:03:26 China’s Strategic Position in Global Oil Supply
01:07:57 China’s Silver Imports and Economic Strategy
01:12:10 The Concept of ‘Magic Money Machines’
01:17:59 Modern Monetary Theory and Its Implications
01:19:19 Emotional Decision-Making in Financial Planning

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I’m really beginning to wonder what the US will look like when we emerge from this.
I’d vote physics for the win for now though - for the next decade at least.

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The Financial “Markets” are another grievous PT Barnum Humbug?

How did we get here?

Speaking of “Markets”, why does Planned Parenthood do “Gender Transitions”?

Something went terribly wrong with American society during the Hippie Baby Boomers’ Roadtrip on choppers to Florida in the Baby Boomer cult movie “Easy Rider”?

“Freedom…Far Out, Man.”

  • Billy, the movie “Easy Rider”
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The Collapse of American society is largely a failure of the Baby Boomer generation?

Billy and Wyatt in “Easy Rider” didn’t really know that Freedom implies heavy moral responsibility, did they?

That’s why Billy never wore a helmet in his chopper, and they didn’t wear condoms while having sex with those 2 Catholic prostitutes while tripping on acid in that New Orleans Catholic cemetery?

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Not denying that The Collapse of American society seems possilbe if not immanent, but 'splain to me what’s heavily immoral about enjoying a motorcycle ride sans brain bucket; and sex- any way you like it- between consenting adults?
I must be misunderstanding your argument… :thinking:

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Maybe we will just make Venezuela very rich while we take our vig and then some. So the USA can take credit for an energy boom and the people of the country of origin get their prosperity…everyone wins! Excuse me for commenting on the article…

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“That’s what Freedom is all about, Man.”

  • Billy in “Easy Rider”

Those Baby Boomer Hippies didn’t know Shit from Shine. They still don’t…. All that they care about is keeping the value of their houses going up and up….

At least the “Freed” slaves understood that Freedom was 40 acres and a mule.

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@cmartenson Can you break down quantitatively why you think we only have 2-3 weeks left before a dramatic repricing of oil? ChatGPT says we could realistically drain 150-200 million barrels. At a rate of 4 million barrels a day that is 37-50 days. Where are my facts or math wrong?

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“Trump stated he now favors higher interest rates to combat inflation (say what??), a sharp reversal from his prior “lower rates or markets collapse” stance.”

Do not seek logic–he said this beause it is happening and he needs to appear in control.

It’s like this WSJ headline today:

Trump’s Endorsement Paralysis

The president’s fear of backing a loser may end up giving the GOP more of them.

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Two datapoints on inflation and the war on cash from the Netherlands:

  1. As part of the fear mongering Dutch government has sent all citizens a leaflet to prepare for three (3) days of self reliance in case of a “calamity” i.e. war or a terrorist attack. One of the recommendations is to have a whopping 70 Euros cash per adult in the home to make purchases during a crisis.

So far gobermint has heavily promoted the use of cards and less and less people have paper bills of money in their pocket. So the move to recommend cash in hand is a radical shift.

  1. For the first time in history, ATM’s in the Netherlands will be loaded with 100 Euro bills. The reason is that inflation is soaring and people need more Euros to pay for food.

Part of the war on cash has always been to nudge people away from larger denominations. Biggest bill in an ATM is 50 euros and to get those is hard : you actually have to tap several menu’s before you get the option. Taking just 10 or 20 Euro out is easy and done with a single tap.

In Germany 100, 200 and 500 Euro bills are routinely used and available in the ATM’s. (One of the reasons the Dutch/Moroccan criminal gangs go there to blow up and rob the ATM’s). In the Netherlands stores freak out if you try to pay with a 100 Euro bill and refuse to accept 200 or 500 Euro denominations. So I guess that mindset will have to be nudged around soon if the food and energy inflation is going to explode this year.

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It’s because of this chart, perhaps the only one anybody really needs.

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The commercial inventories are absolutely plummeting. There’s also an operational floor below which inventories might still exist on paper, but which are insufficient to continue full operations.

To counter this, oil must be released from strategic reserves, which Japan just did again yesterday. But there’s a political floor to those releases, where each country must decide how much oil it absolutely must hold in reserve just in case a war breaks out or something.

It is the US principally, and the West including Japan generally, who are holding back the price of oil. However, they really don’t have all that much in reserve:

image
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As you point out, it’s possible for the West to release ~4 Mb/d from reserves, but the other part of the strategic release problem is the world is currently missing ~15%, or 12 - 14 Mb/d of oil + products from the Middle East.

Which means commercial stocks are being drawn down up to ~10 Mb/d. Take another close look at the top chart. Note that ‘days of inventories’ is about where it was in 2008 when oil spiked to ~$220 in today’s dollar terms ($147 then).

Every day the Strait remains closed lops another 5-10 Mb from commercial inventories. Tick tock.

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Here’s some more info on Japan:

Japan cuts deal with Mexico, via Nikkei Asia:

Japan will import 1 million barrels of crude oil from Mexico as soon as July under an agreement between the two countries’ leaders, it was learned Wednesday, as Tokyo takes a small step toward diversifying its energy supply away from the conflict-torn Middle East.

Japanese Prime Minister Sanae Takaichi spoke with Mexican President Claudia Sheinbaum by phone on Tuesday, requesting an increase in crude oil exports.

This is believed to be the first agreement between Japan and a foreign government to secure an alternative source of oil.

Naked Capitalism

I can tell you right now that this will not work.

Mexican oil is mainly in the hands of Pemex. Pemex’s reserves and production are both falling. Eventually, they will have to limit supplies just to provide for the support of Mexican needs.

Moreover, America imports crude from Mexico to make up for America’s deficits in real crude production. There is no way that Mexico can carry both the US and Japan. It isn’t close to being possible. Soon they will not be able to support exports to either country.

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Who will win?
Jewish supremacies (?)

(Oh, behave!)

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Hi Chris,

One of my friends I discussed this issue with agree that US might not be fully energy independent, but they think that Venezuela as a vassal will be able to provide the heavy crude that the country needs. How does Venezuelan oil factor in to the numbers?

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Good question.

VZ has recovered back up to it’s relatively easily achieved export number of around 1 million barrels per day.

image
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To get back up to 1.5 Mb/d is going to require a lot of investment money. 2.5 even more. Lots more.

In the scheme of things it certainly helps, but it does not completely plug the hole.

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Question: What happens if/when inflation comes roaring back due to wicked high energy prices?

And lets not forget all that lovely increase in the money supply to 1) ‘Pay’ for the war 2) ‘Support’ citizens with handouts to counter rising prices…

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I woulda thought the appropriate emergency reserve is ‘$20 cash, a jerry can of gas and a tin of baked beans’…

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Until they get sick of being a vassal… then the insurgency starts

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“Freedom” aka laziness, degeneracy, leftism, BS “kindness” (encouraging uselessness and creating useless people/“victims”) etc are all very easy when there is a great demographic structure (lots of young and few old) and plenty of energy and new tech and cheap goods.

But the infrastructure, morality, cohesiveness etc that allowed the good times to happen needs to be maintained - not degraded while you engage in degeneracy.

So now we have degraded infrastructure and uselessness, all of which pave the way for the hard times as we go into a tougher demographic structure and less energy. Sigh.

Of course, we know that various things that degrade society have been heavily promoted by powerful interests. So, en masse, the people didn’t really stand a chance.

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There are a lot of other items on the list to make an emergency pack. Tinned food, water, a flashlight and a radio. What is more telling is what is NOT on the list. Items to defend yourself when the police is unavailable for instance.

And 70 euros will do nothing in an inflated crash event. But it feels good to be prepared….

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