Sept. 6, 2022


While we were enjoying the last summer holiday in Europe, they were in a full-blown panic. A panic that I'm afraid may come to these shores if we're not careful.

As you undoubtedly heard, Russia closed the Nord Stream II Pipeline for repairs. Pipeline repair is a perfectly normal event, and it happens every year. Last year, the pipeline shut down for ten days for repair.

But this year, Europe is simply beside itself. They are petrified that Russia will cut off natural gas altogether. And as natural gas is the primary way the Germans heat their homes, it's understandable that they would be concerned.

As to where the distrust comes from? Perhaps that originated with the Europeans themselves. After all, we are now up to five separate European sanctions against Russia. Each one pledges to import fewer Russian products and supplies. The latest sanction, declared five weeks ago on August 4th, prohibited the importation of Russian coal. This sanction implied that Europe would oppose importing any Russian fossil fuels in the future.

These policies are consistent with the European and American efforts to transition to "green/renewable" energy.

So, here we are: On August 4th, Europe institutes the fifth round of Russian sanctions, including, for the first time, sanctions against fossil fuels in the form of coal. Less than a month later, Russia shuts down the Nord Stream II pipeline. Coincidence? I don't think so. And apparently, neither do the Europeans, who are now crying to high heaven that Russia re-open the spigots.

So that's the supply side of this equation. Russia has shut down supply, and now Europe panics.

But there is another dimension to this drama: price. It's in the cost of energy. Here, we can see the full impact of this controversy. Since Russia began its Special Military Operation in Ukraine, the price of natural gas in Europe, especially Germany, has risen by 300%. Gas spiked another 36% in Germany over the weekend when Nordstream II was closed.

Higher prices are the perfectly logical result of a lack of supply. We have limited supply results in higher prices. I make this obvious point because it is not so apparent to our Central Bankers, as we'll see in a moment.

In our modern financial system, these higher energy prices have rocketed throughout the economy. Today, prices can be sent from headquarters to shops and stores anywhere in the country, from Bentonville, Arkansas, to Bar Harbor, Maine. Electronic price tags can change instantly, reflecting the retailers changing costs.

Remember that energy is a component of every commercial endeavor, from lighting an office to building a home or making a car. All require energy. So as the price of energy increases, so to the cost of the end-product will rise.

Just what should we call this kind of price rise? To the politicians like Ursula von der Leyen, European Commission President, and US President Joe Biden, who set us on this path to energy shortages with their green transition and boycott of Russian supply, these politicians want to call this "inflation." Essentially saying, "It's not my fault. It's the bankers."

Inflation becomes the scapegoat for the woefully inadequate geopolitical and environmental policies of Europe and America. The political class has turned the tables on both sides of the Atlantic. They tell us that we're no longer in an energy crisis created by shortages in supply. Instead, we have an inflation problem that the Central Banks can solve.

This week three central banks will meet in Australia, Canada, and Europe. Next week the Bank of England meets, and after that, the Federal Reserve. Undoubtedly, each will raise interest rates to fight "inflation." Analysts estimate that the five central banks will increase core interest between one-half and one-full percentage points. Higher rates will undoubtedly have the desired result, to depress commercial activity throughout those countries.

But what of energy supplies? This hike in interest rates will not affect supplies. Ursula and Joe will be free to continue their "transition" to less but greener energy. And perhaps that is their point—less energy for everyone.

It was gratifying to see that at least one Banker recognized this. In his address in Jackson Hole, Jerome Powell acknowledged that he could not fix the supply issue. At least a step in the right direction. He sees that the higher prices we currently face are not entirely monetary. However, I expect him to vote to raise interest rates when the Fed meets in two weeks.

But as you can see, the higher prices we face today fundamentally come from the higher cost of energy, let's call it what it is: "Nordflation."


On the Economy:


Energy continues to top the news today. In Italy, the head of the League Party, Matteo Salvini, has called for lifting Russian oil sanctions, claiming that Italians are (quote) "on their knees" because of these high energy prices.

While in California, a heat wave is causing record electricity demand, as residents of the Golden State turn on the A/C for some relief. Officials are predicting rolling blackouts as early as today, as electricity demand is outstripping supply. And, oh yes, California has requested that drivers not charge their electric vehicles during this crisis. Yep, the same EV's that will be mandated in the state by 2035.

Back to Italy, where to underscore Mr. Salvini's point, manufacturing production in Italy declined by better than 2% for Julyand better than a 1% decline for the year. The cost of energy again.

While Great Britain reported that their economy has fallen into contraction, with the latest three-month GDP report declining by 1/10th %

Here in the US, a couple of essential benchmarks. First, up will be the latest reading on inflation. You'll recall that CPI inflation last month at 8 1/2%. But this morning, Wall Street does not estimate where inflation is now. Recent gasoline price declines could push inflation down slightly. At the same time, retailers and suppliers are still raising their prices to catch up with their higher costs. So this morning, we will all be looking for just where inflation is headed now.

After the inflation report comes the 30-year bond auction, the Treasury Long bond is currently trading at just under 3.4%, and I would expect the auction to come in around that price. Interestingly, it is still below the 20-year bond, indicating a yield inversion on the long end of maturities.

In earnings today, three tech companies are reporting from the West Coast: "Upath Incorporated," Getlabs, and Guidewire Software. All report after the markets close.