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Good morning. It’s non-farm payrolls day. A number will appear at 8:30am ET. If it is much below, oh, 350,000 jobs added, we will declare the porridge too cold. If it is much above 650,000, we will declare the porridge too hot. Either way, the bears will eat Goldilocks. So here’s hoping for lukewarm, I guess. Email me: email@example.com
High energy prices are not an accident
Thursday’s letter on energy prices left a lot of points unmade. Many of the omissions were emphasised to me by readers. Here are a few:
Energy inflation is a feature, not a bug, of decarbonisation
A lot of commentary around the recent price spikes has been along the lines of, “this is what happens when you listen to Greta Thunberg and rush to sideline fossil fuels without replacing them with something better, you dummies”.
This view is more naive than the idealism it criticises. Any effective path to decarbonisation was going to involve shocking increases in the prices of fossil fuels. How else does demand for fossil fuels fall, if not in response to prices? It was never going to be washed away by the milk of human kindness.
The important thing is what happens in response to falling supply and higher prices. Does it spur government policy and private investment back towards fossil fuels, or forward towards alternative energy sources? I spoke with Jason Bordoff, director of Columbia University’s Center on Global Energy Policy, about this. He said:
The only thing that helps the climate is if demand falls with supply. Demand falls because of policy, and because technology drives the costs of the alternatives down, and capital goes into them. Some will say higher [fossil fuel] prices are what causes higher investment in alternatives. But they are going to cause a backlash against the climate policies that we really need.
What this [crisis] shows is how difficult, disruptive and messy this transition is going to be. Whoever thought we could replace the lifeblood of the world economy and that would be easy? It’s going to be super volatile.
So we watch as the Biden administration, which rattles on about green infrastructure, discusses releasing national petroleum reserves to end “a politically perilous surge in the price of gasoline”. But what will do more to get the green infrastructure built than expensive gasoline?
Saving the world is going to be inflationary, or it’s not going to work.
This crisis is going to prove that fossil fuel divestment is a bad way to fight global warming
Institutional investors under the pernicious influence of ESG investment consultants avoid hydrocarbon stocks. Prices of hydrocarbon stocks fall to attractive levels. Opportunistic investors buy them, and make a bundle when energy prices rise:
“It’s such a great and easy idea,” Crispin Odey, founder of London-based Odey Asset Management, told the Financial Times. “They [big institutional investors] are all so keen to get rid of oil assets, they’re leaving fantastic returns on the table,” added Odey, whose European fund is up more than 100 per cent so far this year.
That article, in the FT on Thursday, pairs nicely with this one, about private buyers snapping up the fossil fuel assets public companies dump. Secondary market investors shunning the oil and gas industry can effect stock prices. That doesn’t alter industry behaviour, because it can pay a bit more for the capital it needs and still make a bundle.
Putin is inflationary
Russia’s president sent natural gas prices tumbling when he said that he was ready to help stabilise European prices by releasing additional supply. The head of the International Energy Agency says Russia has the capacity to do just that. Which raises an interesting question, as several sources pointed out to me: at record prices, why wasn’t Russia selling into the spot market already? Was that a political flex, or what? Just the fact that the question has to be asked, it seems to me, creates uncertainty that will encourage hoarding and help keep European gas prices high.
High energy prices threaten emerging market growth the most
Here is the price of Brent crude, with all-time highs marked in with a red line. Not so bad! We’re barely at the 2018 highs, let alone the supercycle highs of a few years before that.
Yeah, well, here is crude priced in the currencies of India, Turkey and South Africa:
Diana Choyleva on China’s urban consumers
In response to the troubles at Evergrande, market opinionators have arranged their views on China around two poles:
Chinese growth has been driven by wasteful, debt-driven investment, paradigmatically in real estate, and this has reached a limit. While the authoritarian financial system can avoid the kind of debt crisis that would follow mass malinvestment in the west, the economy’s key growth pillar is gone. Sell.
China’s government knows it has to open up the financial system, shift the economy towards consumption, and encourage its consumers to shift their savings away from real estate and towards markets. Buy.
Diana Choyleva of Enodo Economics rejects both. She accepts the premises of the latter view, but thinks that the party’s simultaneous efforts to reduce inequality will cripple its efforts to build up the consumer economy. She told me:
China needs the consumer to be an economic driver, because exports stopped being a driver after the financial crisis. That’s when investment and debt became the solution. Post-crisis, the rest of the world could grow at its old rate, but China could no longer take an ever-larger part of the pie, because its currency become overvalued. Then came the trade wars…
. . . [the government is] not placing China on the sustainable path of having the consumer drive growth. Everything Xi has done is destroying the consumer. De-risking the shadow banking industry — that’s where consumers could get a higher return. Then the housing [crackdown] — that will have a massive negative wealth effect. The response to Covid emphasises [to consumers] the arbitrariness of the system.
Here she is in a recent note to clients:
The big loser from Xi’s levelling-up agenda is the well-off urban consumer. Now is the time to start shorting high-end consumer discretionary brands with China exposure, such as Nike. And if you want to stay with the consumer theme you can add a long position on premium brands, such as Hermes or Rolex, which the Chinese buy as a store of value.
A wholesale restructuring of an economy and financial system as big as China’s surely comes with the possibility of big mistakes, and it sure looks to me like the Communist party is making some already. Too often China bulls waive this simple point away by saying something about how the Chinese government “takes the hundred-year view”. Investors can’t wait nearly that long.
One good read
Absolutely fantastic, jaw-dropping Bloomberg article about Tether.