sam stribling's avatar
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Global Energy Woes and Inflation
With the recent news of a "partial mobilization" coming from the Kremlin, it seems there is no end in sight to the war in Ukraine. This continues to be putting added pressure on the global energy markets. I noticed a disturbing trend in the EU that I think should be on everyone's macro radars. Nationalization, this is when the state takes over an otherwise publicly traded or privately owned entity for security/stability reasons. Stated another way, when things get so bad that the entity would otherwise go under due to financial reasons, but they provide a critical service needed by the people the state steps in to own it. This was a big debate back in 2008 with the likes of AIG and other companies that were ultimately "bailed out" by the US government vs. being taken over entirely (as I believe Fannie Mae and Freddie Mac were as a GSE, government-sponsored entity).

This week, Germany was the first to Nationalize Uniper, their primary natural gas provider. There are now rumblings of the French Nationalizing their Nuclear Industry which came as a surprise to me considering I thought Nuclear would be thriving especially since the French, unlike the Germans have embraced the technology for their green energy needs. Apparently, I was wrong.

What does this mean / why is it important?
Energy and food continue to be the leading causes of inflationary pressure that all these central banks, including the FED, are aggressively raising rates to combat. I have a bit of a different opinion than many of the pundits you read/watch on the subject. As I understand it, the way raising rates combats inflation is via demand destruction. However, when inflation is coming from a sector that is critical to life as we know it and those same governments are deciding to nationalize them I do not see how you can destroy that demand, and therefore reign in the inflation related to it. I do not see a demand problem with energy but a supply problem. Taking a step back, destroying energy demand implies people using less of it, that sounds nice but I do not see energy as something that can be "destroyed" as it would mean that people would be forgoing lighting, heating, transportation, and commerce to reduce the demand side. I can't see that happening, I would be willing to bet that people will have to bite the bullet no matter the cost to keep their lights (and internet) on. Replacing supply is much harder than destroying demand which is why I am concerned that raising rates will not effectively bring prices (inflation) down.

TLDR: Things are not going well in the global energy markets. States are needing to step in to provide stability to their people by buying these companies out and owning them. Since these services warrant the state coming in, I view them as critical and therefore very inelastic which is a bad thing for the global central bank's demand destruction strategy via interest rate hikes. The combination of these factors will continue to be very challenging for the global economy to overcome.
Nathan Worden's avatar
Appreciate the independent analysis—
If increasing rates destroy demand, then you argue we should stop increasing rates, correct? Does that mean that we need to be ok with ~9% inflation until more energy supply infrastructure can be built? (Which could take a decade)
sam stribling's avatar
@nathanworden that’s the big question.. if it’s truly inelastic how does raising rates crush the demand? I would be ok leaving rates as they are now at this point but aggressively hiking us into a depression doesn’t sound like the answer either.
Nathan Worden's avatar
@strib got it— yeah it feels like we’ve hit a sustainable level where any further rate hikes has more negative side effects than positive.

But it’s at this moment where human irrationally is so good at overshooting 🙃
sam stribling's avatar
@nathanworden yep. I’m just thinking about what demand destruction looks like for energy. All I can think of is your home state, honestly (California), so does it look like everyone turning their thermostats up to 78 when it’s 105 outside vs. rolling blackouts or what? The inverse is true too.. turn your heat off in winter to save energy. To me, that’s the last thing you consciously cut out of your life. Except for maybe our other inflation culprit.. food..
Nathan Worden's avatar
@strib for California, it probably means a combination of less travel, try to cut down car usage, use air conditioning less, heating less— this will hit the poor way harder than the upper-middle class. As I look at the suburb communities in my area I find it hard to believe that most people will adjust their thermostat much. They’ll probably just pay more.
sam stribling's avatar
@nathanworden so what I’m hearing is it’s inelastic lol 😂
Nathan Worden's avatar
@strib oh no— energy is a Veblen good— as price goes up, using energy becomes MORE sexy and demand goes up too.

😂 I’m trollin’ 🥲
sam stribling's avatar
@nathanworden what a word! Veblen. 🤣
Nathan Worden's avatar
@strib luxury cars, hand bags, plastic surgery— demand for Veblen goods goes up the higher the price is. We live in an interesting world.

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