Commodity & Infrastructure Insights

The Fed is walking a fine line, and it’s easy to take this comment out of context. Inflation can be too low, and in order to ensure they adhere to their dual mandate of maximum employment consistent with stable prices, the Fed is willing to take a little risk with price stability. Nonetheless, if the marble hallways of the Federal Reserve building in Washington DC display carved quotes from Powell’s predecessors, this one is unlikely to be added.

Debate continues over the cause of the extended power cuts in Texas last week. Predictably, party affiliation colors views. Republican Governor Greg Abbott said, ““the Green New Deal would be a deadly deal for the United States of America.” Two former Energy Secretaries, Rick Perry and Dan Brouillette blamed frozen wind turbines, and over-investment in renewables at the expense of ensuring more robust infrastructure.

BP’s Statistical Review of World Energy offers many interesting and sometimes surprising insights about global energy. Start with our neighbors to the north. In a poll last year, two thirds of Canadians believed climate change is as serious an issue as Covid. Canada has a carbon tax, and lowering emissions has long been official government policy. However, adjusted for population Canada is an energy hog, consuming 380 Gigajoules (GJ) per person, compared with the U.S. at 288 GJ. Canada has the highest use of any OECD (i.e. rich) country, and two times the OCED average.

Modern Monetary Theory (MMT) argues that because a government can never go bankrupt in its own currency, the only constraint on spending is inflation. Applied to the U.S., this justifies pandemic stimulus checks, spending on infrastructure and clean energy initiatives, expanded Obamacare and doubtless other initiatives too. Price tabs begin at $1TN nowadays. Stephanie Kelton’s book, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy is worth reading to better understand where this theory will take us. We reviewed it last November.

The impact of GameStop (GME) will resonate far beyond a few short-selling hedge funds. It’s a rare breed of manager that runs exclusively or mostly short positions. Behind the forensic financial analysis that’s required lies a deep skepticism of company executives.

Last week John Kerry, Climate Czar, warned that natural gas pipeline assets could become “stranded assets” within 30 years. Democrat attitudes toward fossil fuels remind one of St. Augustine (“Lord, make me chaste—but not yet.”). Three decades of debauchery before celibacy shows self-discipline, under the circumstances. Since Biden now owns U.S. climate change policy, indulging the fantasies of climate extremists must be balanced with keeping the lights on.

Last week Williams Companies (WMB) held their first ever ESG Event. As might be expected, the most interesting parts were on the “E” (Environmental). It’s hard to find much original to say on Social issues, and Governance should simply mean following industry best practice.

In early November when Pfizer’s vaccine announcement triggered a strong rally, technology stocks lagged small cap value. Having been out of favor for years, the Russell 2000 sprang to life, drawing in buyers at the expense of tech.

The cold winter currently being endured in north-east Asia isn’t just a boon for those hoping the planet isn’t burning up. It is setting a fire under local prices for Liquified Natural Gas (LNG). Because of the relatively high cost of moving LNG by tanker, regional price differences can be far wider than for crude oil, where transportation costs are a much smaller portion of the overall shipment.

Although we generally write about investing in midstream energy infrastructure, we find macro subjects interest our readers too. In April, not long after the market low, The Stock Market’s Heartless Optimism was popular, as any guide to the market’s direction was eagerly sought. We regularly use the Equity Risk Premium (ERP) to illustrate the relative value of stocks versus bonds. Earnings forecasts never fell as far as the market, which is what propelled its rebound for the remainder of the year.