[This blog post is an excerpt from a commentary posted at https://speculative-investor.com/ last week]

In several respects, the past few years have been different from anything in the past. In some cases the reason for the unprecedented outcome is not hard to find. However, while it is always possible to concoct an explanation after the fact, in other cases the reason for the unprecedented outcome remains in doubt.

As an example of an easy-to-find explanation, the fact that the US stock market has become more expensive and more concentrated than ever before is a predictable consequence of the increasing influence of passive investing.

A case where the explanation for the divergence from the historical record is far less clear is the fact that in the US, economic conditions that in the past always were followed by a recession did not lead to a recession. Instead, the economy went from one boom to another with an intervening bust phase that lasted about two years and never became severe enough to qualify as a recession.

One of the many indicators we can use to make the point that this time has been different is charted below. The chart shows that with the exception of the extremely short COVID recession of 2020, which was caused by the government suddenly shutting down a large portion of the economy, every recession (the shaded areas on the chart) since the start of data collection in 1985 was preceded by a sharp downturn in Residential Construction Payrolls (RCP). Furthermore, prior to 2022 there were no multi-year periods in which RCP essentially went sideways. Consequently, the period from 2022 onwards stands out. For the first time, RCP peaked and instead of dropping spent years going sideways near its cycle high.

After the fact, we can come up with three main reasons why the US economy never became weak enough during 2022-2024 to officially enter recession territory. Here they are:

1) The government spent money (provided fiscal stimulus, that is) as if a recession were underway while the economy was still growing, boosting employment and economic activity in the process. However, this alone could have done no more than delay a recession. In addition, it would have increased the severity of the eventual recession.

2) During 2023-2024, the Fed released about 2.5 trillion dollars into the economy from its Reverse Repo Facility. This meant that during a 2-year period in which the Fed supposedly was tightening monetary conditions, it actually was a net injector of liquidity into the financial markets and the economy. However, like the ‘amped up’ government spending, this could have done no more than delay a recession.

3) The combination of items 1) and 2) potentially could have delayed the start of a recession by 1-2 years, but at around the time that their positive short-term effects on the economy would have ended, the AI-related investment boom became big enough to counteract all other negatives. This wasn’t planned or — as far as we know — foreseen by anybody. For policymakers in the government and the central bank, it constituted blind luck of a very rare kind, because it is unprecedented for a new technology to have such a substantial effect on economy-wide economic statistics within such a short period.

The effect of the AI-reflated investment boom has been positive as far as economy-wide measures of economic activity are concerned, but for many individuals the effects to date have not been positive. In particular, the demand for energy and materials from AI-related spending has increased significantly the cost of living for the average person. Consequently, datacentres have become an important political issue.

“It is different this time” is said to be the most dangerous expression in the world of investing. It usually is a dangerous idea to hold, but the fact is that sometimes it really is different.

[This blog post is a brief excerpt from a recent commentary at https://speculative-investor.com/]

In the 10th June Weekly Update we discussed the potential for the El Niño currently underway to become the “super” variety, with major adverse consequences for food production around the world and especially in Asia. Before we provide an update, here’s a brief description of the El Niño and La Niña weather phenomena from the article linked HERE:

“Normally, Pacific trade winds blow west across the equator, carrying warm South American water toward Asia. Cold water then “upwells” from the depths to replace the warmer surface water that’s been pushed away.

El Niño is a natural climate cycle that disrupts this pattern. It’s triggered by weaker-than-usual trade winds — winds that end up allowing much of that warm water to flow back toward the west coast of the Americas.

Ultimately, that warmer water forces the Pacific jet stream — a high-altitude air current that acts as a 7,000-mile “conveyor belt” pushing storms east across the Pacific toward North America — to move south of its usual path, altering weather patterns across the U.S. and the globe.

La Niña is the exact opposite: stronger trade winds, colder water and a Pacific jet stream that moves north rather than south.

El Niño and La Niña happen roughly every two to seven years and last nine to 12 months. El Niño generally arises more frequently than La Niña.”

This year’s El Niño stands a good chance of becoming strong enough to qualify as “super”, meaning that surface temperatures in the Pacific are on track to become much warmer than would be the case in an average El Niño. Super El Niños are relatively rare, typically occurring every 10-20 years. However, as discussed in our 10th June commentary, a Super El Niño combined with other natural climate cycles could result in weather conditions during 2026-2027 being similar to those of 1877-1878, when Asia experienced the worst drought in centuries.

Evidence regarding the likely consequences of the 2026 El Niño will start to become available by August, because by that time it will be possible to make an initial assessment of India’s monsoon season. In particular, much less rainfall than usual in India during June-July (the first two months of the monsoon season) would increase the risk that an event of similar severity to 1877-1878 is in store.

The broad correction in the commodity markets that began in April could continue for a few more months, but as we mentioned last month, a “super El Niño” probably would result in grains and other crops being among the first commodities to resume their longer-term bullish trends. Therefore, over the months ahead we will be looking for opportunities to add more agriculture-related exposure to the TSI Stocks List.

[This blog post is an excerpt from a commentary published last week at https://speculative-investor.com/]

After the war against Iran broke out in late-February, we thought that the oil market was under-estimating the scale of the oil supply problem and that a price of US$150-$200/barrel would likely be seen in the US futures market if the war continued for more than a few weeks. However, by the first half of April — with the war still very much in progress — we thought that the crisis essentially was over and that oil’s price spike to the US$120s in early-March would turn out to be its peak for the year. This was based on the price pattern and the progress of the war. As the oil price subsequently made progressively lower highs and the futures curve flattened, we became more convinced that the early-March peak was, indeed, the intermediate-term variety, while any remaining doubt was removed as soon as the US-Iran MOU was put in place. Some oil market analysts, though, maintained their $200/barrel price forecasts throughout the downward price trend and are still talking-up the short-term risk of a price rise of that magnitude. Why have these forecasts been so wrong and why, in all likelihood, will they continue to be wrong?

After the start of the war, several actions were taken that helped ‘fill the void’ created by the closure of the Strait of Hormuz (SOH). On the supply side, most of these actions were obvious and accounted for in price forecasts. Examples include Saudi Arabia re-routing oil from its east coast to its west coast via pipeline and oil being released from strategic reserves. The mistakes were on the demand side and the biggest of these was to not account for China reducing its oil imports by more than 5M barrels/day.

We started writing about the large reduction in China’s oil imports in early May, which also is when related articles started to appear in the press. But if this information was starting to appear in the mainstream media during the first half of May, it’s reasonable to assume that large traders in the oil market had been aware of it and had acted on it much sooner. In more general terms, when you discover information in the mainstream financial press (Financial Times, Wall St Journal, Bloomberg, etc.), you should assume that the information already is reflected in market prices.

Another mistake worth highlighting is associated with global oil inventories. We keep reading about plummeting inventories and storage tanks rapidly emptying, which creates the impression that the world will soon run out of oil. The reality, though, is that commercial oil inventories are not materially different today than they were at the start of this year. To further explain, there have been large inventory drawdowns, but only in the inventories (strategic reserves) managed by governments. This means that there will be no need to replenish the inventories in a hurry.

An important related point is that the reduction in the US Strategic Petroleum Reserve (SPR) accounts for about 75% of this year’s reduction in global strategic petroleum reserves. This is important because the US does not need a strategic reserve, so the US government could take as long as it wanted to replenish the SPR or simply choose not to replenish it.

Therefore, what’s being touted as a dangerously low inventory situation is a non-issue.

All of which brings us to a critical point: At any given time, the most accurate assessment of the current supply of oil relative to the demand for oil is provided by the slope of the oil futures curve, that is, how contract prices change as delivery months become more distant. The slope of the futures curve tells you the extent to which the market is well supplied, while the change in the slope over time tells you whether the supply situation is becoming tighter or looser. For example, there were times between early-March and early-April when the price of the nearest oil futures contract traded more than $40/barrel above the price of oil for delivery nine months later, indicating a severe shortage of physical oil, but the difference between these contracts has since trended lower and is now only about $3. This suggests that although the oil supply situation is still tight, the extent of the tightness has reduced dramatically. Moreover, it continues to move in the direction of increasing abundance.

Summing up, when it comes to assessing current oil supply relative to demand, the futures curve is vastly superior to any analyst.

[This blog post is a slightly modified excerpt from a commentary published at https://speculative-investor.com/ last week]

Assuming that the US-Iran Memorandum of Understanding (MOU) remains in effect and the Strait of Hormuz (SOH) reopens as agreed, the prices of equities, industrial metals and gold could have an upward bias for a few more weeks. If so, it would be reasonable to view this period of relative buoyancy as an opportunity to reduce portfolio risk by building up cash. Doing so would result in an opportunity cost if prices were to continue trending upward, but it would both mitigate the financial consequences of sizable corrections and enhance the ability to take advantage of future price weakness. After all, it’s always easier to buy low if you previously sold higher.

The overarching issue right now is that financial market liquidity is ebbing while high-profile inflation indicators such as the CPI are poised to stand in the way of decisive actions by central banks to bolster liquidity, potentially paving the way for meaningful price weakness within the next few months. We note, in particular, that currently all the world’s most influential central banks are either actively tightening monetary conditions or on hold*, while the gold and crypto markets have been warning for some time about declining liquidity. Also worth noting is that massive IPOs will in effect be shifting demand from the stock market to real assets. For example, the SpaceX IPO transferred US$75B from stock market investors to the company — money the company will now spend on building datacentres, rockets, etc. The same thing happens when instead of spending money on stock buybacks, companies such as Microsoft, Alphabet, Meta Platforms, Oracle and Amazon spend the money on AI-related infrastructure.

Furthermore, it’s likely that the markets have gone a long way towards pricing-in the best-case outcome for the conflict in the Middle East, leaving far more scope for a negative surprise than a positive one.

With regard to industrial commodities, our concern is solely about the short-term, because much higher prices remain likely over the coming 1-2 years. In fact, an implication of the intentions outlined in the US-Iran MOU is that the future demand for many industrial commodities will receive a significant new boost. The boost will come from a privately financed US$300B development fund that will be established to rebuild Iran and that will, if implemented as envisaged, help to integrate Iran into the global economy. This aspect of the deal has been widely criticised, but it is extremely positive. The greater the amount of trade with Iran and the more that foreign companies/investors are involved in Iran’s reconstruction, the lower the probability of another war.

*The Fed is on hold with regard to interest rates, but the new Fed Chair is considering a balance sheet reduction. At the same time, a substantial monetary tightening is underway in China and both the ECB and the BOJ are hiking interest rates.