Transcript:
Easan Arulanantham:
Recession causes oil use to go down. And inflation causes commodities, like oil, gold and silver to rise – this is also true. But what wins when you’re kind of playing them against each other? What are your thoughts on that?
Tom Vaughan:
Okay, so oil hit $130 A barrel after the invasion is now 97. And it’s dropped a lot, just in the last a month, six weeks. And so always remember that the markets are looking forward. So inflation is right now, right? That’s an issue. But the markets are looking forward. And so the markets right now are pricing in the possibility higher, at higher higher and rate of a recession. In a recession, there’s less oil used. So in this environment, right now, the recession beats the inflation. It’s possible what they call stagflation, right, where you have no growth, and a situation where you still have higher inflation, mainly because the especially in the area of energy, it is set on a worldwide basis, but it’s pretty likely that we’re going to have a worldwide recession. Honestly, in my opinion, if we have one here, it’ll be you know, other places. Matter of fact, you know, Europe probably has has even more threat of a recession than we do and might contagious to us as far as that goes. So I think that recession wins in this particular case, because recession is the forward looking thought process that the markets looking at. And so it’s looking longer term down the road and is saying, okay, you know, recessions coming, there’s gonna be less oil usage, and the price of oil has been coming down, you know, for that. There’s some other reasons, too, you know, obviously, there’s always many, many variables coming in, and the COVID lock downs and the threat of more COVID lock downs, and China is a big issue. They’re a huge consumer of oil, because they’re one of the biggest kind of the world’s supplier of goods. And so when they cut back, they use less energy, there’s less cost. So there’s kind of the combination is happening there.
But the question was, you know, inflation makes the prices of commodities and oils go up, recessions, make them go down, who wins?
Right now, I think it’s recession that’s going to win here, unless we don’t have one. Right. And so that’s the key. That’s the difficulty here. Because if we don’t have a recession, and we continue to have inflation, then commodities and oil, and those prices will continue to go up. But look at the Federal Reserve, I don’t think they’re gonna allow inflation to go and go, go, they’re gonna kill everything in sight, trying to get inflation down, I think that’s a mistake. But I think they’re gonna do it anyway. And if they have to go through quarter and three quarter and three quarter, you know, whatever it takes, and so eventually, you know, because these increases that they’re doing are delayed reaction. So in other words, you know, we don’t see this set, three quarter point increase that they’re going to do here, you know, in July, we might not see the real impact of that until January. So they’re levering these things up. Without really knowing what’s going to happen in January, we might get to January and realize, oops, you know, we’ve done too many. And, you know, wherever that is, maybe it’s the first half of next year at some point in time. And this is the typical pattern for the Federal Reserve is that they over raise rates, they create this big downturn. And the market is actually pricing in some decreasing of rates for the end of the first half of next year, already this time next year, as far as that goes, for that exact reason, over raise rates, get inflation down, but then it just starts to go the other direction and inflation comes.
And recession comes really hard. And so if that happens, it’s hard to imagine commodities and oil, and what have you doing great there. Unless we see something from Russia, yeah, they could do something there too. So, God, you know, that’s why I don’t play that market that much. There’s too many weird variables that are that can come out of left field, you know, you look at a target, which got hammered, you know, they’re great, great business, I’d rather buy target than oil. You know, personally, just because it’s more defined. That’s a company that’s actually trying to make money. They’re not invading anybody. There’s no, there’s no weird players like Iran and all these things that are in there, you know, so I don’t really play that market that much. As far as that goes, it just is there’s too many ways that somebody can change the calculus that you have, overnight. Right? If Russia decides to cut back half their production tomorrow, that it’s going to go up in price and you would have made money on that energy bet, right. But if they you know, if if all of a sudden Iran comes online, and Venezuela comes online more so things can change pretty quickly there and all of a sudden you’ve got a lower price or a steep recession kicks in and less energy or COVID locked down it’s there’s too many pieces there that are that are out there that I don’t play that game.