G7 Stock Market “Double Down” (and Sentiment Results)…

Leon Neal/Getty Images News

Einstein once said, “The definition of insanity is doing the same thing over and over again and expecting different results.” This is exactly what the G7 decided to do by issuing its communiqué on Tuesday and pushing the Dow down about 500 points and energy prices at the top.

This G7 has been compared to the 1979 meeting that took place in Japan – under the Jimmy Carter era – when there was also a global food and energy crisis. While in 1979 the G7 tried to limit imports from the Middle East – which immediately failed – this time it wants to restrict imports from Russia. They intend to do this with a “ceiling price” (ie a quota). The proposed alternative solution is to go hat in hand to Saudi Arabia and beg for more production. This is embarrassing considering – under a different energy policy – that the United States became the world’s largest producer of crude oil in 2018 and maintained its leading position until 2020. Then the policy has changed…

As Milton Friedman aptly put it: “If you want to create a shortage of tomatoes, for example, all you have to do is pass a law prohibiting retailers from selling tomatoes at more than two cents a pound. Instantly you will have a shortage of tomatoes. It’s the same with oil or gas.

With consumer confidence at rock bottom, the stock market in a bear market, the economy on the brink of recession, financial conditions tightening, layoffs mounting and mass political disapproval across the developed world, you would think they would tread lightly. Instead, they ignored the acute pain (at the gas pump and the supermarket) and the discontent of their constituents and double on the same policies that created it. let them eat cake!!!

u of m study

Fred

Why would oil go up as they “double down” on failing energy policies? Because the natural reaction to oppression is hoarding (i.e. why invest to produce more in a hostile political environment when you could just pay all the money to yourself and other owners in the form dividends and redemptions?).

Those who do not study history are doomed to repeat it. When it’s the seven most important leaders in the developed world – who collectively don’t understand basic history and economics – it’s not just sad, it’s kinda scary.

Some key quotes from the press release:

“We are committed to a highly decarbonized road sector by 2030, including by significantly increasing the sales, share and adoption of zero-emission lightweight vehicles over this decade, including public transport and zero-emission public vehicle fleets.”

“We are committed to reducing hydrofluorocarbon (HFC) emissions throughout the life cycle and welcome international efforts and knowledge sharing initiatives in this regard.”

“We emphasize that fossil fuel subsidies are inconsistent with the goals of the Paris Agreement and reaffirm our commitment to eliminate inefficient fossil fuel subsidies by 2025.”

“We are concerned about the burden of rising energy prices and energy market instability, which are deepening national and international inequalities and threatening our common prosperity. In coordination with the IEA, we will explore additional measures to reduce price spikes and prevent further impacts on our economies and societies, in the G7 and globally.

“While taking immediate action to secure energy supply and halt energy price increases driven by extraordinary market conditions, we will not undermine our climate and biodiversity goals, including the energy transition. , nor our commitments to phase out our dependence on Russian energy, including phasing out or banning the import of Russian coal and oil.

The intention is high. The Implementation is irresponsible. The transition will take time, and there is no proper recognition of this fact (or a reasonable timeline) by world leaders.

While politicians are oblivious to the effects of their misinformed policies, the market has a perfect and clear understanding. The top proxy for the ‘green movement’ is Tesla (down around 48% from recent highs) – while the energy sector is still the best performing group (even after the recent correction in June) .

So rather than complaining about it, what is Warren Buffett doing? Double its position on Occidental Petroleum (OXY). He is betting that the continuation of the restrictive policy will force smaller actors out of production and that only a handful of big producers will survive. Essentially, an incumbent ‘commodity’ (price-takers) business will soon become an ‘oligopoly’ business – with a multi-stakeholder moat and pricing power.

It is the unintended consequence of all poor policies/regulations throughout the ages. If you think Facebook (META), Google (GOOG) (GOOGL), etc. are powerful today, expect them to “regulate the technology” and drive all existing/emerging competitors out of business with an unsustainable barrage of unnavigable bureaucracy.

China already did this last year with its “regulatory technological crackdown”. We will see the effects of this in the years to come, as Alibaba (BABA), Tencent (OTCPK:TCEHY) and JD (JD) take more and more market share while smaller emerging players are left behind.

We think Buffett is right. We also believe there will be better levels from which to recharge – as the masses who have piled into energy over the past four months have just had a taste of the hatch opening as the he exploration and production index fell by more than 30% in less than 2 weeks.

XOP

Stock charts

1966?

In our June 16 note, we covered market similarities to 1994. Yesterday, an analyst named Jim Bianco was quoted in MarketWatch comparing current conditions to 1966:

“I think the most comparable bear market we’ve had right now is in 1966,” Bianco said at a media event on Tuesday. While the Fed was also battling inflation in the 1960s, the S&P only fell 22% in the 1966 bear market, he said, calling the period ‘slightly worse’ than the bear market. 20.3% of the benchmark since its close on January 3. peak at 4,796.56, according to Dow Jones Market Data.

“Even if a small recession occurs at the end of this year or the beginning of next year, which is becoming the consensus opinion,” according to Bianco, he does not expect a “true cycle of credit” takes place. “I don’t think anyone wants to default on their mortgages right now. Their homes are still in the money relative to their level of debt, thanks to sensible lending reforms,” he said. “We see every incentive for them to want to stay good on the loans they’ve taken out and keep the terms in place.”

I looked back to compare market price action and posted my own annotated analogues below:

1966:

six 1966

Stock charts

2022:

six 2022

Stock charts

This type of rebound would also be consistent with what happens historically after a terrible first half. The S&P 500 is on track to end the first half at its worst YTD performance in 50 years.

MarketWatch: Data compiled by Dow Jones Market Data shows that the S&P 500 has rebounded from falls of 15% or more in the first half. The sample size, however, is small, with only five cases dating back to 1932 (see table below).

2nd half performance

Data

As long as inflation expectations continue to fall (5-year breakevens have fallen by one full 1% over the last three months – from 3.59% to 2.59%), the aforementioned scenario remains within the realm of possibility (despite all policy errors). If inflation expectations rise again, then all bets are off…

5 years BE

Fred

Now let’s move on to the short-term view of the general market:

In this week’s AAII sentiment survey result, the percentage bullish rose to 22.8% this week from 18.2% last week. The bearish percentage fell to 46.7% from 59.3%. Retail investors are still extremely fearful.

feeling

AAII survey

bull

AAII

CNN’s “Fear and Greed” went from 22 last week to 25 this week. This again shows extreme fear.

fear and greed

CNN

fear and greed chart

CNN

And finally, the NAAIM (National Association of Active Investment Managers Index) fell to 19.86% this week from 32.18% equity exposure last week. Based on positioning, we expect to see aggressive “panic buying” coming in if Q2 earnings/forecast isn’t as bad as expected.

index

NAAIM

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