Weekly Research Briefing: Testing Leverage Points

"Canada fuels American growth, supplying 99% of their natural gas imports, 85% of their electricity imports, 60% of their crude oil imports. I don’t think they want us to stop sending any of that energy."

“It’s a little bit like paying your mortgage with your credit card,” James Sullivan, the co-head of global fundamental research at JPMorgan Chase, told CNBC. “It can work for a while, but eventually the mismatch starts to become more obvious.”

Trying to control the yield curve is expensive and ultimately futile. The popular saying is that you can’t fight the Fed, but it should also be that you can’t fight the long end of the curve. Monetary policy can set short-term rates, but it doesn’t control long-term rates. Monetary policy has some influence — some of the current spike could be because the new Fed chairman is less transparent, or the Fed may be giving up on its inflation target. But no matter what the Fed does or says, long-term yields are set mostly by markets.

A government or central bank can try to keep rates low by buying bonds itself or requiring banks and pensions to buy them. But eventually market conditions will prevail. Financial repression also comes at a steep cost; Japan is a cautionary tale. Its government tried for decades to cap long-term rates, and the result was low growth and distortions in financial markets. Now that inflation has returned to Japan, its central bank must choose between higher rates or inflation, and it is struggling to defend the yen.

The lesson is that if a government wants to keep long-term interest rates low, there is really only one way: debt reduction. This truth was forgotten, and sometimes denied, for the last 20 years.

Market doesn't give notice before it revolts against the debt. But so far this month, as debt crossed $40 trillion, the 30-year bond yield hit a 19-year high, gold rose 13%, silver +18%, GSCI commodity index +5%, BTC +19% and the dollar weakened. Markets are saying something.

The administration’s only response thus far has been to issue short-term debt to buy back long-term debt and talk about cracking down on waste and fraud. The reality is that neither party is close to having the political will to address the fundamental drivers of the debt.

Markets may settle down. This may just be a blip. Or it could mark the return of the bond vigilantes. No one knows. But it’s alarming how unserious both policymakers & public remain about supporting the difficult measures needed to address the fiscal problem spooking markets.

“With respect to rates, I think we -- as we’ve said over the past few years, housing turnover, just as one -- kind of one point in the economy that we watch has been at historical lows. It has never been lower as a percentage of the housing stock and every time we’ve seen it hit the sort of 3% of the housing stock changing hands over history, it’s always bounced up relatively quickly. We’ve seen housing turnover at these low levels for 4 years now. So I don’t think that we’ve seen much volatility from the recent increase in rates. We do know that when we see step downs, we begin to see a little bit of life come into housing, but there’s just no sign of an inflection point at this moment.” - The Home Depot CFO Richard McPhail

@KevRGordon: Single-family housing starts fell by 9.9% in July and are close to breaking thru their November 2022 low.

Brent crude prices climbed about 30% since early July to trade around $93 per barrel amid renewed fighting in the Middle East and delays in reaching a permanent US-Iran peace agreement… Stocks have suffered more when oil rises than they have benefited when it falls, Morgan Stanley’s Michael Wilson said, making stable crude prices increasingly important for the market.

Supply is tightening, inventories are drawing and the SPR buffer is diminishing. We now forecast a more drawn-out Middle East supply recovery, which leaves the market in deficit throughout 4Q and 1Q. With that, we revise our Brent forecasts higher, peaking at $100/b in 4Q.

In November, Texas Gov. Greg Abbott declared his state the “epicenter of AI development” while announcing a $40 billion investment by Google.

Less than a year later, the Republican said he halted approvals of some 1,800 new data centers worth billions of dollars on concerns that they use too much power and water. The move earlier this month drew the ire of President Trump, who this week staunchly defended the centers as an economic engine.

A growing voter outcry over data centers that strain resources and fuel a technology capable of putting Americans out of work is becoming a mounting liability for Republicans and some Democrats in this fall’s elections. Abbott’s opponent in his bid for a fourth term, Democrat Gina Hinojosa, has hammered him on the issue while climbing within a few percentage points in recent polls.

EM economies have evolved significantly over the last 15 years. With the exit of Russia from the investable group, EM is now much less dependent on energy, commodities and banking. At the same time, the demand for semiconductors, memory chips and other hardware — the physical components of the AI revolution — has caused a technology boom.

Electric car sales are on track to hit record highs this year, with 29 percent of all new cars purchased around the world expected to be either purely battery-powered models or plug-in hybrids, according to a recent report from the International Energy Agency. That’s a sharp increase from just 4 percent in 2020.

The boom in sales was somewhat unexpected. Some analysts had predicted a slower market for electric vehicles this year — until the U.S. war with Iran and the closure of the Strait of Hormuz caused oil and gasoline prices to spike. That has led to a frenzy of electric car sales in many unexpected corners of the globe.

In South Africa, sales of electric cars more than quintupled in the first half of this year compared to the same period last year. In Laos, imports of battery-powered vehicles from China are soaring. And in countries as different as Australia, Colombia and South Korea, the E.V. share of total new car sales has nearly doubled since fighting in the Middle East began.

The rise of electric vehicles is upending international car markets. Total sales of traditional cars with internal combustion engines have been in a steady decline, and this year, they’re expected to reach their lowest level since the early 2000s.