Transcript:
Easan Arulanantham:
Does the rising energy costs effect you know, the Federal Reserve’s rate increases, you know, is like our accelerate it because inflation will spike alongside with rising energy costs.
Tom Vaughan:
Yeah. So, you know, we had, we had a 7.5% increase in inflation, and on the last report, year over year, and we saw energy prices jumped 27%, right in that same time frame. And so it’s a big driver of the inflationary situation. And the Federal Reserve is now currently looking at two mandates, what they call full employment, or basically helping the job market and keeping inflation down, right. And those are kind of contrary to each other. Actually, they’re kind of interesting that they try to find a balance there. They are looking at this job market. And the job reports probably that we just came out today would make them feel even better about this. But they think this job markets really hot. I mean, Powell just testified this this week, they think the job markets fantastic. And it was 700 676,000 jobs created that was just reported today, you know, and that was way more than expectations. So the job markets really, really good. From an inflationary standpoint, wages didn’t go up that much. Point 1%. So that that’s actually a good thing from inflation. But situation, Ukraine is driving up the price of oil, you know, it hit $150 A barrel back in 2007, we did survive that, by the way, I wouldn’t be surprised to see us getting there again. And we’re seem to be working our way in that direction. And especially since, you know, although Russia doesn’t produce a massive quantity, it’s 10% of the world’s you know, oil needs, for example, it will take some time for that to be absorbed by these other producers, especially since oil production is already been tight. It’s already been tight because of the pandemic slow down oil production, slow down, it just hasn’t caught up fast enough to demand has been coming up faster than supply for everything, including oil. And so that’s why we’re seeing increase there. So when you see an increase in energy prices, there’s a couple things that can happen there. Number one, it can cause an inflationary situation, if companies can pass along that increased cost to the consumer.
So can Federal Express so uses gas, for example, to drive their trucks? Can they increase the cost to the consumer, for package delivery, without losing a lot of demand, right? Because in economics, and when you increase the cost, oftentimes the demand will drop right as a kind of guns and butters, what we’ve learned in econ 101. And one of the things that happens there. So far, we haven’t seen demand drop off, demand just keeps on going. It’s crazy, retail sales are going and all these things. Here in America, people have a lot of money on average, you know that the total net worth of Americans grew by $36 trillion from the bottom of the pandemic to the end of last year. And so people have enough money to pay more for that Federal Express or pay more for that food. Now, there’s always this group at the bottom that’s going to get hammered here. And that’s the real problem is this is why they got to get this under control. But so so the Fed would see that inflation coming through from energy, and they can try to raise rates. And what happened then is that raising rates can slow demand. And that has the potential to then eventually slow the amount of growth that’s happening in energy. I mean, I mean, a great example is if when they closed down the economy, right, oil went to negative $40. At for one day. So when demand drops enough, the price of oil drops. And so if the Federal Reserve can push up interest rates, slow down demand, then that basically means that they could bring the price of oil down in that regard. So it’s not a perfect correlation. We’re just one country, there’s all kinds of different dynamics that happen as far as that goes.
The other scenario that’s interesting is just that, if they are raising rates at a higher rate, because of the oil price, because that’s pushing inflation, that can create slow growth all together, right, you can bring down the economy’s growth, to the point where you could create recession, and that is probably the biggest fear that’s out there. I don’t subscribe to that, because I think the economy’s hot enough to handle some of these rate increases, even if they do get a little bit aggressive. But that’s a different story. And so, I actually think that some slower growth is better, we have too much growth, it’s too hot. And that’s creating this inflation and we got back to a more moderate growth pace. I mean, you know, the Gross Domestic Product is 7% in the fourth quarter as ridiculous for a country our size. And so getting, you know, we’re usually at two or two and a half or 2.3, or something along those lines. So getting back to that kind of more normal growth cycle would, I think, be a good thing be some adjustments, stock market would have to adjust with that, too. Lastly, if if companies cannot pass along the extra cost, so Federal Express, finds that even you know, their cost of gas keeps going up and up and up, then, you know, obviously, what happens is they want to raise the price of their package delivery, but then all of a sudden, their demand starts dropping off a whole bunch, they reached a point where they can’t, that means that they’re basically going to make less money, right. And this is not just fat Express, it’s all companies that have to deal with energy, which is most, I mean, even our company deals with, you know, heating and cooling, and we have to pay for that. And such, if that goes up a lot, you know, if if consumers are paying more, I saw a stat I thought was kind of interesting. And you were telling me to that so that an average gas price in the US went up to 389. Right? I think it’s here in California, what would you say it was in California?
Easan Arulanantham:
Oh, I think California just for $5. For like the low, lowest octane gas.
Tom Vaughan:
Yeah, probably at seven. So, you know, if you’re spending $5, instead of $4, at the gas pump, right, that’s money that could be going someplace else. And so that that definitely is a drag on the economy as far as that goes to. So those are the issues that you deal with, with increasing energy prices. And, you know, generally they’re not great one of the hedges, there’s to own energy, we don’t have a big energy exposure in our portfolio, just because of the volatility, and the fact that a couple of countries can just decide to turn up the production dramatically and wipe out your your energy stock portfolio piece. And so that that always makes me a little bit nervous as far as that goes.
Easan Arulanantham:
What about Clean Energy, though, would not be an interesting play, because with high energy prices, does Clean Energy just become a little bit more of a viable option for investment.
Tom Vaughan:
Yeah, I think Clean Energy has a couple pieces going for one is higher energy costs, right? I mean, it just makes it more viable. You know, when oil is selling at $40 a barrel, it’s a lot harder to convince somebody to spend money on solar that or whatever is wind, that might cost more than that to produce. I don’t know the exact numbers for all these things. But when oil is at $120, a barrel, $150 barrel, yeah, all of a sudden, people start taking a look at that, but actually think there’s another component driving this. And that is this kind of energy security, I would bet you anything that Germany is looking at their situation right now thinking, wow, this was a mistake, to be in a scenario where 50% of our gas is coming from Russia. And these pipelines are great, and they’re probably getting great prices on all this stuff. But now they’re gonna have to go through a lot of pain and dealing with this. And so just adjusting away from Russia. And so one thing will be this more production from these other countries, you know, to kind of create more, but I think you’re gonna see a big push into that Clean Energy arena. Because if you’re producing your own solar and wind and geothermal or whatever it is that you’re going to call Clean Energy, you know, in your in your country, that gives you more capabilities. And I know China has been working on it really dramatically, because they still get a lot of their energy products from outside their country. So if they can produce that in a Clean Energy manner, become they become independent, becoming energy independent, is pretty critical, I think, in this kind of geopolitical situation that we’re in now.
So yeah, you could see some great gains out of Clean Energy, we saw a massive, massive run up and Clean Energy in 2020, right? Just unbelievable. I mean, we had some pieces that just went nuts. And then they’ve just really sold off to 2021. And even through the beginning of this year, just now since this invasion started, we’re starting to see some of those move again. The only problem that I see from a stock market standpoint, there’s a usage standpoint, and then there’s the stock market standpoint, isn’t some of those companies are still overvalued, they got run up so much. And in this environment, the market is looking for cash flow, earnings revenues, and some of these companies don’t quite have that yet. I know Tesla’s actually had a decent run up since the invasion started as a company, it has cash flow, has earnings, has battery storage, they have a lot of Clean Energy pieces that that some of these places might be interested in. So there are a few plays out there like that, that are kind of fascinating. You know, we might see some good gains ended. I hope so. I love that category. And we haven’t been in it much anymore, just because it’s gotten hit so hard. But it’d be fun to see it come back and just I worry a little bit about the valuation still, just because it’s still kind of early cycle in that arena.