Leftist economists live in a dream world
But energy investors live in the real world and it is paying off for them
There is a stand off taking place between central banks and bond investors with consumers caught in the crossfire. Fed governor Jerome Powell reported that the Fed was pausing its rate increases in part owing to the market driving up rates without Fed intervention, while both the Biden and Trudeau governments merrily keep spending, working at cross purposes to the central banks. Economists for the Fed, for major banks, for both the U.S. and Canadian government, and for financial information firms like Bloomberg are regular guests on financial news media each with a differing view on whether there will be a “recession”, whether a recession has already begun, or whether the economy will enjoy a “soft landing” as borrowing rates nudge 22 year highs and economic growth keeps on trucking. Some economists now claim that their traditional tools like the “Phillips Curve” which relates unemployment and inflation no longer seem to have much validity.
Put any two economists in a room to discuss the outlook and they will emerge with three opinions. Unlike the laws of physics, the mathematical models of the complex economy are really no more reliable than the anthropogenic global warming (AGW) theory which pretends CO2 causes climate change, now so popular with leftists willing to destroy the economy to “save the planet”.
As a student of history, I am reminded of the encyclical issued by Pope Innocence VIII encouraging the torture and murder of “witches” who the Pope thought caused the crop failures and poor weather of that era, the equivalent of the current AGW nonsense but in the 1400’s to 1600’s when the cold period following the Medieval Warm Period prompted the Pope and monarchs to blame everything on witches.1
Today, leftist leaders like Justin Trudeau and Joe Biden have jumped on the modern “witch hunt” which doesn’t blame climate change on old women riding brooms but instead blames every bad weather day on the trace amounts of CO2 in the atmosphere, so dangerously low at present that if the popular NetZero goal were ever achieved CO2 levels would fall below the 150 ppm by volume level in atmosphere needed to support plant life and the planet truly would have an “existential threat”.
Reality is easier to understand and doesn’t require anyone to buy into a nonsensical theory. The high inflation of the late 1970’s and early 1980’s which crippled world economies followed sharp increases in energy costs. So did the rapid rise in inflation in 2022. And, the increase in energy costs is a direct result of the modern day “witch hunt” blaming fossil fuel emissions of CO2 as the cause of bad weather with predictable shortages in the offing and high inflation the result.
Central banks can’t do much to control energy costs other than try to bring the economy to its knees with nosebleed interest rates, just as they did in the late 1970’s and early 1980’s. When your only tool is a hammer every problem looks like a nail.
Tiff Macklem bitched publicly that the Bank of Canada and Ottawa government were working at cross purposes as federal spending kept throwing fuel on the inflation fire despite the Bank’s efforts to slow economic growth. U.S. economists have made similar claims about Biden’s massive spending and a U.S. debt level so high that interest on the debt will soon exceed defense spending and pass the $1 trillion level.
The excess “money printing” of leftist government spending exacerbates the inflation problem but its cause is simpler - climate policies that limit supply of fossil fuels in the absence of any effective alternatives. Investors get it and are avoiding long term treasuries which is making money more expensive and putting their money into oil & gas firms who are making sure they don’t cave in to silliness by spending cash flows on expanded output in the face of governments bent on destroying their businesses and instead are directing record cash flows to dividends and share repurchases.
The result? Investors living in the real world and ignoring nonsense like ESG and DEI in favor of energy investments enjoyed the highest returns of any sector in 2021 and 2022 and likely will again in this year (although it may be a contest with bloated valuations of tech stocks).
Recession fears have kept energy names in check so far in 2023 but with WTI at US$80 plus, the energy companies are making plenty of money and paying out handsome dividends, so no one will have to hold a tag day for investors wise enough to eschew treasuries and buy oils.
In summary, energy is such an important part of world GDP and the correlation of inflation to energy prices so compelling that government leaders need a lesson in market economics (difficult subject for the socialists we were stupid enough to elect) and need to get off the “climate change” horse and expand oil & gas production to bring down both energy prices and world inflation. It is too obvious to ignore but also unlikely with leftists in power, so give it some thought on election day.
I am indebted to Gregory Whitestone for the chart and for his succinct description of the witch hunts of yesteryear published by CO2 Coaliton.