Commodity & Infrastructure Insights

Since Quantitative Easing (QE) was first unleashed in the 2008 Great Financial Crisis (GFC), the Fed has generally found it easier to grow its balance sheet than shrink it. Their huge bond portfolio has depressed government bond yields, which are the benchmark from which all other fixed income securities are priced. The MBS and loans on bank balance sheets mostly originated within the last few years. From mid 2019 until early last year, the ten-year yield was below 2%.

Since Quantitative Easing (QE) was first unleashed in the 2008 Great Financial Crisis (GFC), the Fed has generally found it easier to grow its balance sheet than shrink it. Their huge bond portfolio has depressed government bond yields, which are the benchmark from which all other fixed income securities are priced. The MBS and loans on bank balance sheets mostly originated within the last few years. From mid 2019 until early last year, the ten-year yield was below 2%.

Commercial banks have long benefited from depositor lethargy regarding rates. Although we now have a de facto guarantee of all commercial banking deposits, not just those up to the $250K threshold, customers are likely to pay a little more attention to return and risk, which will force banks to be more competitive.

Real estate investors are keenly attuned to the Fed’s efforts to curb inflation. The Vanguard Real Estate Index Fund (VNQ) is down 18% over the past year, lagging the S&P500 which is –6% and the American Energy Independence Index (AEITR) which is –1%.

The BP Statistical Review of World Energy used to be a fact-based compilation of useful data. Skimming through the 2016 version, it recounts what happened and comments on likely trends. In recent years it has unfortunately degenerated into a political document. The historic data remains useful, but its implausible forecasts are there to defend itself against woke climate cops accusing it of burning up the planet.

The BP Statistical Review of World Energy used to be a fact-based compilation of useful data. Skimming through the 2016 version, it recounts what happened and comments on likely trends. In recent years it has unfortunately degenerated into a political document. The historic data remains useful, but its implausible forecasts are there to defend itself against woke climate cops accusing it of burning up the planet.

Wednesday’s soothing words on inflation from Fed chair Jay Powell seemed a distant memory after Friday’s blockbuster employment report. The market liked hearing that , “…the disinflationary process has started.” More relevant now is his warning that, “The historical record cautions strongly against prematurely loosening policy.” Investors are Confronting Asymmetric Risks, as we noted on Wednesday.

Most of the commodity questions we get relate to crude oil, since its price reflects energy investor sentiment and can move midstream prices. When oil and pipelines are down, people want to know why the volume dependency of midstream cashflows isn’t visible in stock price performance. The correlation between the two is unstable (see Energy’s Asynchronous Marriage).