Anyone holding their breath in anticipation of the Fed cutting the overnight rate anytime soon exhale. It isn’t going to happen prior to September, if it happens at all in 2024. The inflation and overall economic data just don’t lend themselves to softer monetary policy. So much so, while I am not predicting one, at all, a rate hike at the next meeting would make more sense than a cut.
Even so, the markets seem to have accepted this realization incredibly well. And why not? The economic data continues to surprise to the upside. Corporations continue to make money. The U.S. consumer is still spending, in aggregate. The Federal Reserve has largely put a backstop on the bond market by reducing the amount it is shrinking its balance sheet. The rest of the world seems to be in flames, and the U.S. looks great by comparison.
In so uncertain terms, the U.S. remains investors’ best bet, and they are responding accordingly. But for how long? That remains to be seen.
Although stock market returns have been much stronger than we anticipated in May, I have been telling clients and prospects to expect a rocky summer. While everything I wrote in the above paragraph is true, continued results like we have had will need a better reason than “what else should I do.” At some point, investors will be comfortable enough with the rates on their deposit accounts, at least in the short-term, and market inflows will cool or slow.
That is a clever way of saying demand will lessen, and even the U.S. stock market isn’t immune from Econ 101. Nothing is, at least over time.
When I think about long-term demand trends, I keep coming back to two primary economic sectors: energy and technology. I don’t think there are any sensible people who think the global demand for these will decrease over the next decade. In fact, I would even argue it is going to accelerate, much to the chagrin of climate activists in the United States and Western Europe.
Simply put, the growing ‘Global South’ will demand increased levels of energy and electricity as it aspires to consume a fraction of what we do here in this country. Another way of putting it would be Washington and Brussels can have whatever energy policies they want, the rest of the world isn’t going to follow their lead. Not this time.
There is simply too much at stake at the local level.
Readers of this newsletter/blog know I have long maintained successful economies have three primary characteristics: 1) adherence to the rule of law; 2) strong individual property rights, and; 3) the adequate development of human capital to meet the needs of the local economy. Without these, I don’t care who you are, you will fail.
Increasingly, there seems to be a fourth: access to readily available, reliable and economical energy/electricity. Of course, you could argue you will likely have this if you adhere to the first three. You would undoubtedly be correct in most cases, but not necessarily all.
Think about it. If you don’t have access to energy, you won’t be able to generate electricity. Without that, you won’t be able to do the basic tasks of a modern economy, at least not efficiently. As a result, those countries which don’t generate and consume electricity, per capita, are generally much less well-off than those that do. It isn’t even close.
Consider this. Sierra Leone, a dirt poor country in West Africa, has the lowest per capita electricity usage in the world at 12 kwh per year. According to my cocktail napkin calculations, that works out to be about 8 hours for the average American (11,267)…per year, which works out to be around 79 seconds per day. How can that country possibly succeed like that?
For grins, global per capita electricity usage is around 3,204 kwh. That will put you in the economic neighborhood with Moldova, North Macedonia, Ukraine and Bosnia. You know, basically in keeping with the Balkans and less successful former Soviet republics. Should that be our aspiration? Or do you think it WILL be the aspiration of much of the, again, Global South?
If every country who uses less than 3,204 kwh/year of electricity per capita were to somehow attain that level of consumption, the global economy will have to generate an additional 10,510,673 GWh, as is gigawatt. That would be about 218% that group of countries’ current level of production. It would be an increase of about 40% from aggregate global production.
From where is that going to come? Just for everyone to get to Balkan-esque levels? The numbers truly are staggering. The financing? The engineering? The fuel? The, and this is key, reliability.
There is little argument the cost of generating electricity from renewable sources has fallen dramatically. However, it is important to remember all things aren’t equal, and costs will vary significantly across geographies. For instance, a solar panel plant might work splendidly in a sparsely populated and sun-drenched countries near the equator. However, in the cloudy Faroe Islands and countries closer to the two poles, solar might not be a good option.
Further, it might not make much sense to put up windfarms in the ‘Intertropical convergence zone,’ also known as the doldrums. This is the least windy section of our planet. Regardless, would anyone really want to clear the necessary rain forest/jungle in order to put up solar or wind plants in places like the Democratic Republic of the Congo or Guyana or Nigeria? Maybe.
Finally, does anyone really want to dam more rivers, thereby destroying wetlands, to generate power? That hardly seems environmentally friendly.
The message is just be careful when/if you read about the least expensive way to generate electricity. Most reports have a de facto ‘all other things being equal’ premise. As we all well know, all other things are rarely equal. After all, the costs of doing anything are going to be drastically different in Phoenix and Dhaka, let alone the cost of generating electricity.
This is why fossil fuels will remain attractive, as it pertains to generating power. They are arguably more reliable across more geographies. Coal is coal. Natural gas is natural gas. They burn when the sun is shining. When it is raining. When it is windy, and when it isn’t. Across latitudes, longitudes and in more densely populated areas. Further, and this important in poor countries, mining/drilling for these fuels employ(s) people who would/could otherwise be less productive and a burden on the state.
Is it any wonder why India and China get a huge amount of their electricity from coal?
As such, it is hard for me to imagine a scenario, other than global economic meltdown, when the demand for energy doesn’t increase more substantially than, well, most other things. Economies, and countries, need it to survive and thrive. So much so, no matter what Washington and Brussels decide to do to their fossil fuel industries, the global demand for dead dinosaurs and ancient decayed matter will continue to be robust.
I don’t need to hold my breath for it. The demand is here now. It will be tomorrow, as well as one hundred years from now. Interestingly enough, thanks to AI, people could very easily still be reading this newsletter 100 years from now…still ‘written’ by yours truly.
However, that is a topic for another time.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this any every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.