Goldilocks Meets Big Oil and a Bond Market Warning

Peter's Market and Economy Wrap, Week Ending July 28, 2023

This was a week that ended with some very good news for the markets.  Suggesting a bit of a reversal of the stagflationary grip we are in, real GDP grew well above expectations at 2.4% as well above the long run trend line of the Fed at 1.8%.  In other words, GDP growth has not been stagnant.

In addition, on the flation side of the stagflation equation, the GDP deflator fell 2.2% while the employment cost index, a broad measure of wages and benefits, increased just 1% in the second quarter, the slowest since 2021.  Meanwhile, the Fed’s favorite inflation measure, the personal consumption expenditures price index, rose just 3%, the smallest increase in over two years while core prices rose less than expected at a still high 4.1%.  This deflation signs are appearing despite robust consumption now driving growth – but remember here that the core rate of inflation remains about double that of what the Fed needs to lower rates.

Markets rallied Friday on this Goldilocks news after a bit of angst during the week over a spike in long term yields and a corresponding dip in long term bond prices – long bond yields are flirting with 4%.  This bond price spike was interpreted correctly as continued inflationary pressures in the economy.

The other good news, with a bad component, was the avoidance of a Teamsters’-driven UPS strike.  The good part of the news is that there will be no inflationary disruptions in the supply chain.  Yet, the contract was rich enough to bake wage inflation into the economy over the next several years.  Thus, this contract, in the eyes of at least some analysts, might trigger a dreaded wage price spiral a la the stagflation of the 1970s.

So the bottom line for the week is that the stock market trend remains up and bullish.  Despite this, some noted voices continue to warn – and I share their concerns – that it is only a  matter of time before it all goes bad.

Among these bearish voices was Peter Schiff, CEO and chief economist at Euro Pacific Asset Management.  According to Schiff:  "The bond market is on the verge of a major breakdown. Not only will this raise the cost of financing the $32.7 trillion National Debt, but it'll crush the loan portfolios of already insolvent banks.”   Meanwhile, Schiff predicted mortgage rates hitting a whopping 8%.

As for other market news worth noting, and to my surprise, Big Oil is robustly expanding fracking in the Permian Basin, which crosses Texas and New Mexico.  This basin is the world’s largest shale basin and apparently nobody at Big Oil got the memo that a green revolution was in progress – Exxon and Chevron each will hit one million barrels a day of production in the Permian Basin alone within a few years. 

As for my speculation for the week, let me put on your radar a couple of fertilizer stocks that popped up on my radar after Russia cancelled its agreement with Ukraine to let Ukraine ships leave the port of Odessa, pass through its Black Sea blockade, and deliver grain around the world.  Equally important here is that this cancelled agreement will also make it more difficult for Russia to export its potash to the world – Russia is the world’s third largest producer and potash is a key fertilizer.

On the grain front, Ukraine has about one-third of the world’s most fertile soil and more than 400 million people worldwide relied on Ukraine for wheat, barley, corn, and sunflower products prior to the Russian invasion.  The UN estimated a 23% drop in grain prices once Russia dropped its blockade so Russia’s act is clearly inflationary.  At the same time, the war in Ukraine has cut grain production by about a third so supplies are shrinking.

The potash angle is even more interesting.  Russia’s production is down since the war and sanctions have cut its exports.  Into this breach have stepped foreign companies and the two that have caught my eye are The Mosaic Company (MOS) out of Florida and Nutrien (NTR) in Canada. 

Mosaic mines phosphate and potash and is the largest US producer of potash and phosphate fertilizer.  Saskatchewan’s Nutrien is the largest producer of potash and the third-largest producer of nitrogen fertilizer in the world.  Hardly as sexy as AI or EV stocks, these are a couple I’ll be keeping my eye on as pressure continues to grow on global food supply from everything from war and drought to increased population.

Ok.  That’s it for now.  We’ll talk again soon.