The Breakdown - Could Oil and a Gov't Shutdown Screw Up Powell's Plans?

Episode Date: September 23, 2023

At the FOMC press conference, Federal Reserve Chair Jerome Powell was asked about the economic factors that could impact rate policy. Two of the examples cited were oil and a potential government shutdown. In today's episode, NLW explores both of those macro challenges. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on Macro, Bitcoin, and the Big Picture Power Shifts remaking our world. What's going on, guys? It is Friday, September 22nd, and today we are talking oil, macro, everything that could throw the economy off. But before we get to that, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link at the show notes or go to Bit. All right, friends, well, we are sort of continuing the macro story today that we picked up around Powell and the FOMC this week. And one of the questions that Powell was asked was about risks that threatened to knock the economy off course. Two that he mentioned that we're going to spend a little

time on today include oil prices and a potential government shutdown. Let's start with oil first. The price of crude oil has steadily increased over the past four months. From a low of around $70 in June, oil reached almost $90 a barrel for the U.S.-based WTI benchmark contract in 95 per barrel and 95 per barrel for international Brent crude earlier this week. The price increase for crude has driven U.S. gas prices back above 380 per gallon, the highest level since last October. Overall, gas prices have ramped up by 20% since the beginning of the year, according to AAA. Now, there are a number of factors all contributing to steadily increasing oil prices since the June lows. The first is OPEC plus, The economic group of oil-producing nations led by Saudi Arabia and Russia have recently

curbed output. Production cuts, which were agreed to late last year, have been gradually implemented over the past six months. In July, Saudi Arabia voluntarily cut an additional 1 million barrels per day from its production quota, about 10% of its previous output. Existing production cuts across OPEC have already been extended into next year, and analysts expect Saudi Arabia to extend their voluntary cuts until March. On Thursday, Russia further constrained supply by banning the export of diesel and petrol. Russia is one of the world's largest suppliers of diesel alongside their status is producing around 12% of the global supply of crude oil. The International Energy Agency said last year that Russian refineries produced, quote, roughly double the diesel needed to satisfy domestic

demand and typically export half their annual production. Analyst opinions focused on the simplest explanation for the ban, retaliation for sanctions. Henning-Gloystein of the Eurasia group said, Russia wants to inflict pain on Europe and the U.S., and it looks like they're now repeating the playbook from gas in the oil market ahead of the winter months. They're showing that they're not finished using their power over energy markets. The Kremlin said the ban was temporary and aimed at addressing rising energy prices in domestic markets. However, they gave no timeline on when the ban might be lifted. U.S. and European policymakers have largely banned the importation of Russian refined fuel since February, which has required Russian supply to be routed through third-party

regions, including Turkey, North Africa, and Latin America. Now, OPEC cuts over the past year were predicated on a weakening demand profile heading into this year. At the time they were announced, recessions were expected across Europe and the U.S. China was an open question with the potential of reopening pushed back in the midst of additional pandemic waves, but since then, the European economy is sputtering along, albeit with dismal manufacturing data out of Germany, the sanctioning of Russian supply has caused European demand to be displaced to other regions with refining capacity, largely India and the Middle East. In the U.S., recession has been continuously pushed off into the future, and oil demand is now back at all-time highs with no signs of slowing. Although the Chinese economy

has hit some turbulence recently, oil demand remains robust. Analysts expect China's oil demand to remain high as Beijing secures strategically important resources. What's more? Analysts expect China's oil demand to remain high as Beijing secures strategically important resources, in part to mitigate geopolitical risks as well as to shore up its manufacturing and transportation industries. So, with oil prices spiking, many are wondering whether the White House will once again intervene in markets using the Strategic Petroleum Reserve. Between November 2021 and September of last year, the White House authorized a number of SPR releases. The final policy saw 1 million barrels per day provided into the market over six months. A small amount of oil was restocked earlier this year,

but the SPR still sits at a little over half its pre-pandemic level. Earlier this week, a headline circulated proclaiming that, quote, Biden says depleting SPR is on the table. This was later found to be a hoax with no legitimate source, but it demonstrates how difficult high oil prices could be for the U.S. economy heading into election season. To wit, many saw the SPR release as a political decision rather than an economic decision heading into the 2022 midterms. In the private sector, U.S. oil inventories have recently hit 40-year lows of 46-day supply, well below the longer-term average of 65 days. And while August's inflation reports already showed a small uptick due to oil-related prices, the effect is expected to be more profound across this month.

Dario Perkins and economists at T.S. Lombard said, The latest spike in oil prices is massively unhelpful. That said, it is important to keep these recent inflationary developments in context. We are not yet in danger of undoing 12 months of solid disinflationary progress, not even close. Others suggested that high oil prices would have a greater impact on growth rather than inflation. Maya Bandari, head of multi-asset at B&P Paribus asset management, said, it really impacts the growth side of the Goldilocks equation rather than the inflation side of things over the long term. Theory is that sustained high oil prices begin to eat into disposable income for households,

alongside higher costs of production for manufacturing and logistics. These combine to reduce growth and potentially tip the economy into recession. Overall, this situation in the oil markets has, to some, many parallels to the liquid natural gas spike in the winter of 2022. Prices in some markets rose more than tenfold. European energy companies scrambled to secure supply at any cost, and multiple firms went bankrupt due to the volatility in markets. This week, Bloomberg reported that the trading arm of French supplier Total Energy's has played a major role in bidding up the price of U.S.-based oil.

Their source claimed that the firm is paying a premium for physical U.S. barrels, pushing the spread against futures to levels not seen since last November. Now, with all of that said, there are some signs that the oil market is beginning to cool off. On Thursday, Brent crude futures fell to $92 per barrel, which represented the third straight day of price declines, which is the longest streak in almost a month. Warren Patterson, the head of commodity strategy at ING, said the Fed's hawkish messaging has, quote, put some pressure on risk assets, including oil. The dollar index has risen by 0.8% since Chair Powell left the podium, a large enough move to weigh on asset markets.

Patterson said he still expects Brent Crude to move above the $100 mark in the near term, but that he doesn't anticipate the move will be sustainable. So that is the view in oil overall. The thing that I am definitely going to be watching more than anything else is the political dimension of this. We are now entering the period where everything, even more than usual, is going to be completely wrapped up in what it means for the election season. If prices at the pump keep trending up, it seems very likely that the Biden administration will be willing to do what it takes, including SPR releases, to get those prices down. But that's just something we're going to have to keep an eye on. Now, what about that other factor that Powell mentioned? Well, yes, indeed, my friends, the U.S. government is once again hurtling towards a shutdown after efforts to pass a short-term

spending bill were scuttled on the House floor on Thursday. House Speaker Kevin McCarthy attempted to marshal Republicans to vote through a package to keep the government funded past the end of September. Closed-door negotiations continued late into Wednesday night, but were apparently unconvincing. The bill currently being considered is the $886 billion defense appropriations act. The bill was stifled in the House after five GOP representatives refused to allow debate to begin by voting against a preliminary procedural rule. Democrats also voted against the measure and appeared to taunt Republicans apparently reveling in seeing the GOP's slim majority, descend into chaos. Among the Republican dissenters was Marjorie Taylor Green, who opposed the inclusion

of $300 million in funding to the Ukrainian war effort. On Thursday, Politico reported that Pentagon sources have said Ukrainian operations have been exempted from any shutdown, making that part of the dispute rather moot. McCarthy sent House members home on Thursday night to return to Washington on Tuesday. He told reporters after the failed vote, quote, two people flipped so I got to figure out how to fix that. That wasn't the impression they had given us. Now, this was McCarthy's third attempt at bringing the bill to the House floor. The current proposal on the table is a 31-day stopgap funding mechanism to forestall a shutdown to begin next weekend. McCarthy remarked on the change in tone in Congress among that extreme element of the Republican Party stating that, quote, this is a whole new concept

of individuals that just want to burn the whole place down. Now, even if a 31-day stopgap is passed in the House, it seems unlikely to make its way through the Democrat-controlled Senate. The bill includes a 30% temporary cut to domestic agencies and immigration law changes, neither of which are likely to get the seal of approval from Dems. Senate Majority Leader Chuck Schumer said, instead of decreasing the chance of a shutdown, Speaker McCarthy is actually increasing it by wasting time on extremist proposals that cannot become law in the Senate. House Democrat leader Hakeem Jeffries remarked that the situation was playing out as a, quote, Republican Civil War. Now, if it comes to pass, this would be the 11th government shutdown since 1980. The logic is that hardline positions that don't

enjoy support in the Congress can be put directly to the American people by shutting down the government and drawing attention to the impasse. Republican Ralph Norman said last week that, quote, we're going to have a shutdown. We believe in what we're doing. The jury will be the country. Still, the record on government shutdowns doesn't really support that strategy. Not one of the 10 previous shutdowns resulted in the dissenting group extracting concessions. Typically, the American people quickly turn on the party they view as blocking access to government services over a petty squabble. Alex Conant, a Republican strategist, said, this is such a dumb fight because there's no principle that we're standing on here. It's just bad tactics. While the dispute is nominally

over excessive government spending, with Republican dissenters pushing for funding to be reduced back to 2022 levels, the underlying problem is, of course, the level of discord within the Republican Party. McCarthy was voted in as House Speaker after a record 15 attempts. The process took four days and frequently descended into a farce. This was only the second time in the post-Civil war era that a House Speaker had failed to be elected on the first attempt. Conant noted the terrible optics of a government shutdown of the Republicans' own making heading into election season, stating that, quote, Biden didn't win because of his political skills and soaring oratory. He won because Republicans blew themselves up with Trump. I'm afraid we're seeing history

repeat itself with the GOP once again helping Biden by shooting themselves in the foot. Of course, never one to shy away from controversy, Trump fanned the flames on Wednesday, posting that, quote, Republicans in Congress can and must defund all aspects of Crooked Joe Biden's weaponized government that refuses to close the border and treats half the country as enemies of the state. He added that, quote, this is also the last chance to defund these political prosecutions against me and other patriots. They failed on the debt limit. They must not fail now. Use the power of the purse and defend the country. Now, zooming out and trying to get away from the politics of the situation, which obviously is not the focus of this show. The reason that this was

brought up at last week's FOMC press conference is that a government shutdown would halt the publication of government data. This would include employment, inflation, and growth statistics, which are currently playing a key role in guiding Fed policy. Now, given how much the Fed has said over and over again, their policy is going to be driven by data, presumably not having access to that data would be a fairly big deal. Yet, in spite of that, Powell tried to put on a brave face saying, if there is a government shutdown and it lasts through the next meeting, then it's possible we wouldn't be getting some of the data that we would ordinarily get, and we would just have to deal with that. Now, by way of some history, the longest ever government shutdown lasted 35 days. The dispute was around funding for the

border wall and quickly turned public sentiment against the Trump administration. Republicans controlled both the House and the Senate, but the administration failed to convince their own party to fund the wall. At the time, Democrat Senator John Tester called it the most stupid shutdown I have ever seen in my life. However, if this week's display is anything to go by, that 2019 shutdown could soon have some competition for that title. Now, what does this all have to do with the Cryptosphere? Well, I think in many ways, these are just exemplary of the state of politics in general. And given that, perhaps it's not surprising that former Senator Pat Toomey is not optimistic about the chances of crypto legislation being passed during this Congress. Just prior to retiring from Congress at the

beginning of the year, Toomey introduced his own crypto bill, which focused on stablecoin regulations. Now, the House currently has two major crypto bills eligible to be brought for a vote. One would establish a stablecoin framework while the other introduces more broad crypto regulations. While speaking at a Georgetown law seminar on Thursday, however, Toomey said, I don't see a path forward in the Senate regardless of how the vote goes in the House. He added that of the two, he sees the stablecoin legislation as having the best shot. The sticking point will likely be Senate Banking Committee Chairman Sherrod Brown. While Brown has been outspoken about the risks of crypto and the need to bring the industry

to heal, he has so far remained extremely quiet on exactly what form of legislation would meet his approval. And of course, any crypto legislation would need the support of Democratic senators to pass a vote to become law. Still, during an interview on Thursday, Coinbase Chief Policy Officer Fariar Shurzad said that she thinks that Brown's lack of commitment to a legislative position might actually be a good thing. Shazad said, he hasn't committed at all on what to do. I might actually take that as a good sign. Those of us who have been involved in legislation, it's really kind of a one-day-at-a-time exercise. Now, last week, Brown wrote a letter to head regulators at multiple agencies, urging them to use their existing powers to crack down on non-compliant crypto firms. This, of course, seems to be the

clear intention, at least at the SEC. On Tuesday, the head of that agency's crypto assets and cyber unit David Hirsch warned that more enforcement actions would be coming against crypto intermediaries, including D-Fi protocols. Still, Tumi, who serves now as an advisor to Coinbase, views Stablecoin legislation as the solvable problem. At the moment, Democrats are pushing for the Fed to serve a central role in regulating issuers rather than granting oversight power to state regulators. This preference is believed to be driven by the White House. Tumi said, I do think it's possible to reach an agreement with the administration. It's not impossible to bridge that divide. He thinks that senior Democrats will get on board once the White House is satisfied with the Stablecoin proposal. Although that

proposal might have to wait until after the election. As Toomey said, in the next Congress, I think it's quite possible to get something done. If you are a regular breakdown listener, it will probably surprise you none to hear all of these stories of governmental chaos, partisan squabbling, and general messy politics. But that is the state of things. That is the picture from here. I hope you are heading into a wonderful fall weekend. So until next time, be safe and take care of each other. Peace.