Here’s a question for you. Of the 11 different sectors in the S&P 500, what was the only one that had a positive gain in September? Was it information technology? Or finance? Or consumer cyclicals?
No. No. And no. It was energy.
S&P energy stocks were up 9% last month. The next best performer was financials. And they were down 2%. It was the best month for energy stocks since February, when they came roaring out of the gate with a 21.5% gain for the month.
In the January issue of The Bonner-Denning Letter, we made energy our ‘Trade of the Decade’. It was based, partly, on how poorly the energy sector had performed the previous 10 years (the worst sector performance in the S&P over that time). Why should that matter?
Well, there’s nothing magic or automatic about 10-year cycles. But historically, if you’ve had a great previous 10 years (as a sector, a stock, or even an entire asset class), it’s hard for the next 10 years to be just as good (or better). Conversely, if you’ve had a bad 10 years (or the worst), the next 10 years are likely to be a little bit better.
With energy, there are practical issues on top of cyclical issues. Practically, as I showed in January, capital investment in the sector fell of a cliff. That was in response to lower prices, higher government subsidies for renewables like wind and solar, and the ‘divestment’ trend from pension funds and asset managers arguing for a so-called ‘energy transition’.
The last one — the argument that the age of fossil fuels is over and we’ll all miraculously move to a ‘net-zero’ emissions world within 20 years — is the one that’s made energy stocks so cheap. The ESG movement on Wall Street and elsewhere stands for ‘Environment, Sustainability, and Governance’. It’s supposedly a new set of metrics and values that professional investors can use to evaluate the quality of a company and whether it’s worth your capital.
ESG will turn out to be a sham before it’s all said and done. At best, it’s a marketing ploy from asset managers to justify the creation of new investment products. Those products appeal to conscientious investors who don’t want to invest in ‘bad’ things and want to improve the world while making lost of money. At worst?
At worst, ESG is a manifestation of the control-freak centralisers and Marxists who’ve invaded the corporate world, government, and academics. They’ve discovered they can control the means of production (corporations) by either getting votes on corporate boards or controlling how capital is allocated by pension funds and large asset managers.
They want to allocate capital to companies based on subjective vales, or collective values, or pipe dreams like the idea you can run modern society on windmills. And to their credit, they’ve spun a good yarn so far. But now?
But now there are a variety of regional energy crises around the world. They’re reminding people that something can’t come from nothing. Electric cars still need factories to make them. Factories need power. Power has to be generated.
Natural gas prices in Europe are up. Inventories were low in the summer. And for some reason — perhaps because we can’t control the climate with public policy — the wind and the sun have been lazy. Plus, nuclear plants have been taken offline for repair (or as in the case of Sweden, permanently).
This sets up an interesting scenario as the Northern Hemisphere heads into winter, where gas demand for heating picks up. Will Europe get its gas from Russia? Or will it step up its buying of LNG on the open market from producers like the US and Qatar? And will that put it into direct competition with China, which is having its very own energy crisis?
This is one of the big issues I’ll be following as the year heads to a close. No one expected rising energy prices when global GDP has struggled to recover from pre-pandemic lows. But last week, OPEC said it expects total global daily oil demand to exceed 2019 levels by sometime early next year. Demand will have recovered.
Brent crude oil prices touched a three-year high last week. And remember, none of this is related to the stronger underlying inflation figures you’ve seen in the US (and even lately in Germany). German inflation hit a 29-year high recently, according to figures released last week. August inflation in the US was 4.3%, according to official numbers. That’s a 29-year high.
Great! High inflation and low growth. Another energy crunch. Could it be an energy shock?
That would make markets start to feel a lot like the 1970s, the era of stagnant growth and inflation (stagflation). The only thing really missing at this point is much higher inflation. Is that coming?
It’s already here, but confined to financial asset prices so far. The top 1% of Americans have increased their share of the nation’s wealth from 29.7% in Q1 2020 to 32.3% as of Q2 2021. In dollar terms, their wealth has increased from US$31 trillion in Q1 2020 to US$44 trillion now.
That’s the kind of asset inflation a rate-setting Federal Reserve Bank president can love (and get rich from trading before he resigns in disgrace). The stock-investing public doesn’t mind looking the other way because they’re along for the ride too. It’s a win-win deal for financial asset owners.
But what happens when that kind of inflation — driven by record-low interest rates, record large deficits, and unprecedented direct stimulus payments — gives way to high, single-digit consumer price inflation? Or double-digit annual inflation in food prices? And soaring energy prices, cold living rooms, and long lines for fuel?
THAT kind of inflation is economically destructive. It’s politically destabilising. And it’s monetarily unsustainable. More on what that means for you next week.
Editor, The Rum Rebellion
PS: In the most recently published Bonner-Denning Letter, I argued that we’re in a kind of money Cold War. It’s being fought between private, free-market money like gold and Bitcoin [BTC] on the one hand, and legal tender government money on the other. But the monetary powers that be are fighting back hard. Not only are they coming after cryptos with new regulations, but they’re also quickly advancing their own plans for central bank digital currencies that give them more power and control over money and over you. If you aren’t prepared for that attack now, it could cost you. And on the other hand, if you have a stake in ‘private money’, you may be able to keep more of what’s yours AND benefit as inflation takes hold.
The Bonner-Denning Letter is co-authored by Port Phillip Publishing founder Dan Denning and legendary investment writer and publisher Bill Bonner. It connects the dots between markets, politics, and history as one of the only macroeconomic, ‘top-down’ newsletters in Australia. For a big picture perspective on the past, the present, and your investment future, click here for details on how to subscribe