Weekly Research Briefing: Flip Flops

US oil companies are cutting spending and idling drilling rigs, as Donald Trump’s tariffs push up costs and falling crude prices squeeze profits, prompting executives to warn that a decade-long shale boom is ending.

Surprise decisions by the Opec+ cartel to pump more oil have compounded the gloom across the US oil patch, sparking fears of a new price war and prompting analysts to cut output forecasts.

“We’re on high alert at this point,” Clay Gaspar, chief executive officer at Devon Energy in Oklahoma City, told investors this month. “Everything is on the table as we move into a more distressed environment.”…

Tariffs have pushed up the prices of steel and aluminium — crucial inputs in the oil patch. The price of casing, the metal used to line wells and the largest expense to drill a well, has risen 10 per cent in the past quarter alone.

“The economics will be challenged. We’ll see more capital pullback as the quarters progress,” said Doug Lawlor, chief executive of Continental Resources, one of the country’s biggest privately held energy companies.

That will force companies to batten down the hatches further as they try to keep Wall Street investors happy by protecting free cash flow to pay dividends and repay debt.

The German government is drawing up plans for a 10 per cent tax on global internet groups such as Meta and Google in a move that could further fuel transatlantic trade tensions.

Germany’s federal commissioner for media and culture, Wolfram Weimer, told Stern magazine on Thursday that the new government was drafting a digital levy on global internet platforms, although alternatives such as a voluntary commitment by the affected tech companies to pay more tax in Germany were also still under consideration.

German Chancellor Friedrich Merz’s centre-left coalition agreed to “evaluate” a tax on internet platforms in its treaty signed in early May, agreeing that the proceeds should be used to strengthen the country’s media landscape.

“We are serious about this,” the former editor of Axel Springer-owned title Die Welt, said in the interview. Weimer added that he had invited “the leadership of Google as well as key industry representatives” to hold discussions over alternatives to a tax, “including possible voluntary commitments”.

A German tax on Google, Meta and other US internet groups could put further strain on transatlantic trade relations at a time when US President Donald Trump is accusing the EU of treating American companies unfairly and wants to impose tariffs as a response.

"We're remaining agile as a situation with tariffs evolves, while also supporting the commitments we've made with our long-term suppliers. As an example of this, during the third quarter, we rerouted many goods sourced from countries with large tariff exposure to our non-U.S. markets. In the U.S., we pulled forward some items that we had planned for the summer and sourced additional locally produced goods to reduce tariff impacts and ensure that we were in stock." – Costco Wholesale (COST 0.83%↑) CEO Ron Vachris

@KevRGordon: Wow. U.S. goods imports fell by 19.8% in April ... that's the largest drop on record

Michael McKee (‪@mckonomy.bsky.social): Theory has been tariff disruptions would start to show in the data in May/June. On schedule, ISM Headline (48.5), new orders, production, employment, inventories, export orders, import orders all contracting. Import orders lowest since 2009. Prices remain elevated at 69.4.‬‬

@KevRGordon: ISM Manufacturing PMI showed 16 industries reporting higher prices for raw materials as of May ... most since June 2022

"The U.S. economy and the U.S. consumer is showing tremendous resilience. Somewhat surprising to me, but I think you have to say the resilience in the economy is pretty pronounced. We still have a significant fiscal impulse. We still have very strong employment. We're moving, as we said, towards more manageable tariff levels. I think that all likely leads to economic growth. I think we're likely to avoid a recession with this baseline set of facts, but the volatility remains, and so it's still a little bit uncertain." – Goldman Sachs COO John Waldron

"But look, the consumer is still highly employed. There's a reasonable level of new job creation. Inflation is in decent shape, although not back to the 2% long-term aspiration. The cost of credit is a little bit elevated from where it was at the end of the prior administration, but not that much. And also, I think consumers have become more habituated to paying a little bit higher prices for their borrowings than during the COVID era with all the 0 interest rates all of that. And so -- and delinquencies seem to be reasonably controlled." – TransUnion CEO Christopher Cartwright

"Our consumers are very, very healthy. They have an average FICO score of 790 at booking. They frankly have a lot of wealth. We have $61 billion of AUM in our wealth business. They have 20 -- this is an interesting statistic just to show you the long tail of COVID, the noninterest-bearing accounts for our retail customers are 26% above today where they were pre-COVID. And they're spending they're spending in line with how they've been spending." – KeyCorp President Christopher Gorman

"When you look at it in the aggregate, about $1.7 trillion has moved from our consumer accounts into the economy year-to-date through May 15th or so. That's up about 6% from last year. That's a faster rate of growth than the fourth quarter of last year and the fourth quarter of the prior year. So it's accelerating during the year. And, you know, it's not people getting ahead of the tariffs — this is going all over the economy. And that's because people are in relatively good shape...The answer is: the consumers are spending money. That means the US economy has an anchor to windward that very few economies have, because that huge consumer base spends. And our customer base supports that across the board." – Bank of America CEO Brian Moynihan

A short-lived bump in tariff-driven inflation could pass quickly enough to allow U.S. interest-rate cuts later this year, especially if tariffs themselves ease, Federal Reserve governor Christopher Waller said.

New trade barriers are likely to push up prices in the short term, Waller said in a speech at a conference in Seoul, South Korea, on Monday morning local time. But the inflation probably won’t stick around as stubbornly as it did in the early 2020s, in part because labor-market tightness and government stimulus are no longer pushing the economy to its limits, Waller said.

That could put the Fed in position to cut interest rates later this year not because the economy is faltering, but because inflation will be under control, Waller said.

“I would be supporting ‘good news’ rate cuts later this year” assuming that tariffs level are moderate and inflation and unemployment look healthy, Waller said, according to a published text of his speech.

The U.S. government has run large deficits for decades, but concerns about borrowing are intensifying because interest rates are at their highest in years, making it more expensive to service the debt. And neither Trump’s tariffs nor attempts to cut spending in Washington appear likely to change the overall fiscal trajectory.

One member of the panel of private financial institutions that advises Treasury on its borrowing, speaking on the condition of anonymity for fear of reprisals, characterized the tax bill as a “poisoned chalice” that is raising anxiety levels in the bond market as debt-service payments crowd out other forms of government spending. Eventually, there might not be enough demand among investors to buy a glut of new debt, requiring the government to pay even more interest to attract buyers — driving up borrowing costs across the economy, the official said.

“We are operating at really high levels of debt and deficits, and the bond market is increasingly worried about it,” the official said.

JPMorgan Chase Chief Executive Jamie Dimon delivered a dire warning for the markets, predicting a crisis unless the U.S. takes steps to address its spiraling national debt.

“You are going to see a crack in the bond market, OK?” Dimon said during an interview at the Reagan National Economic Forum in California. “It is going to happen.”

Bond markets have been rattled by the prospect that the already wobbly fiscal situation in the U.S. will worsen, should tax legislation backed by President Trump become law. A House-passed measure would increase projected budget deficits by some $2.7 trillion over a decade, adding to a national debt that already stands at more than $36 trillion…

Without substantial changes, the U.S. is headed for a reckoning, Dimon said. “And I tell this to my regulators…it’s going to happen, and you’re going to panic,” he said. “I just don’t know if it’s going to be a crisis in six months or six years.”

There is general agreement from Yale’s Budget Lab, the Committee for a Responsible Federal Budget, Piper Sandler and other analysts that the bill would add $2.8 to $3.4 trillion to deficits over the next ten years when including interest on the incremental debt, and when compared to the CBO baseline1. If certain temporary provisions become permanent, the cost could reach $5 trillion. And this is after the alleged impact of “GOP budget hawks” in the House, a designation that should probably be retired at this point2. The reconciliation bill now goes to the Senate where we do not expect major changes.

The first chart shows the major widgets of the House bill: first some spending cuts which are mostly Medicaid, food stamps and student loans; then extension of all TCJA tax cut provisions; then some offsets to raise revenue, mostly assorted tax hikes (including a retaliatory tax on companies from other countries that I’m in favor of3) and a sharply scaled back energy bill; then some new tax cuts (on tips, overtime, seniors, SALT etc) and some manufacturing incentives; and then at the end of the chart, funding for homeland security and defense.

The US sovereign CDS spread is currently trading at levels similar to countries that are rated BBB+, such as Italy and Greece.

"Private equity activity, which is an important component, probably 30-plus percent of the M&A market today is still very good. Activity is picking up. We're seeing steady flow. There's a lot to do. There's over $3 trillion of enterprise value sitting in private equity and venture capital portfolio hands, those entities have to get transacted upon. There's an enormous forward pipeline that is there. Obviously, more certainty, better economic backdrop will allow us to prosecute more of that sooner."

"Capital markets, as we said, started more muted in the second quarter than the first quarter. And as I said, we've seen signs of improvement. We priced 8 IPOs last week. So that's a pretty good sign that things are starting to fall and our pipeline remains very strong." – Goldman Sachs COO John Waldron

“This is the watchword: uncertainty. It is impossible to know what the status of the tariffs will be next week, not to mention next month,” Reuters quoted the EU official as having said. “If you want sane, stable, even boring, rules-based order and predictable business environment, Europe is the place for you.” (EU Official on Friday in Brussels)

The dollar will tumble to levels last seen during the Covid-19 pandemic by the middle of next year, hit by interest rate cuts and slowing growth, according to predictions by Morgan Stanley.

The US Dollar Index will fall about 9% to hit 91 by around this time next year, strategists including Matthew Hornbach predicted in a May 31 note. The greenback has already weakened this year as trade turmoil weighs on the currency.

“We think rates and currency markets have embarked on sizeable trends that will be sustained — taking the US dollar much lower and yield curves much steeper — after two years of swing trading within wide ranges,” the strategists wrote.

The provision amounts to “weaponization of US capital markets into law” that “challenges the open nature of US capital markets by explicitly using taxation on foreign holdings of US assets as leverage to further US economic goals,” George Saravelos, head of FX research at Deutsche Bank AG, wrote in a report on Thursday. “We see this legislation as creating the scope for the US administration to transform a trade war into a capital war if it so wishes, a development that is highly relevant in the context of today’s court decision constraining President Trump on trade policy.”

Section 899 takes aim at countries including Canada, the UK, France and Australia that impose “digital services taxes” on large technology companies such as Meta Platforms Inc. The clause also targets countries using provisions in a multi-country deal for minimum corporate taxes.

The measure would boost the federal income tax rate on passive US income earned by investors and institutions based in the targeted countries, first by five percentage points, then rising by another five points each year to a maximum of 20 points above the statutory rate.

Morgan Stanley’s strategists included the provision in frequently asked questions related to the tax-and-spending bill and concluded that Section 899 would weaken the dollar and European stocks with US exposure. Gilles Moec, the chief economist at AXA Group, said it could add to the pressure on long-term interest rates, which this month touched multi-year highs. Others see it dragging on the US currency.

“It indeed sounds troubling,” said Rogier Quaedvlieg, senior US economist at ABN Amro Bank NV. “By limiting new foreign demand, that would of course put pressure on the dollar.’”

During risk off days, government bonds are no longer fulfilling their role as the ‘shock-absorbers’ in a traditional portfolio. As such, there is now an ongoing clear and present danger for global allocators who bought into the idea that when stocks sell off, bonds will always rally. Importantly, this significant break down in asset allocation theory is occurring not only in the U.S. but also across most other global developed markets.

Knowledge is a process of piling up facts; wisdom lies in their simplification.

Martin H. Fischer, German-born American Physician / Teacher / Author (1879-1962)

All of you have heard a lot about [AI] job displacement. Every job will be affected. Some jobs will be lost, some jobs will be created, but every job will be affected. And immediately it is unquestionable, you're not going to lose a job – your job to an AI, but you're going to lose your job to somebody who uses AI.

NVIDIA Co-Founder & CEO Jensen Huang @ Milken Institute Global Conference – 5/25

At EQT Corp., the country’s largest independent natural gas producer, business is good — and it’s about to get better thanks to a surging local industry that needs all the Appalachian energy it can get: Artificial intelligence.

“I mean the size of this thing, it’s crazy,” Rice says. “We are hearing estimates for power demand for AI that’s anywhere [from] 50 to 75 gigawatts of power, which is the equivalent of the power needed to power 10 to 15 New York Cities.”…

Several years ago, Doven recognized that Western Pennsylvania, with Pittsburgh at its heart, was poised to be the center of the AI revolution. Local politicians were often dismissive of anything that had to do with natural gas, but to Doven, the connection was obvious between the anchors of research and innovation coming from Pitt and Carnegie Mellon and the abundance of resources nearby to power it. So, she started the AI Strike Team, a group of leaders she assembled from industry, academia, health care and the trade unions to work together to position the region to lead the AI revolution; and she located it right here in Pittsburgh’s “Tech Alley.”

“Our roots here are building hard things — from steel to robotics — and they perfectly match the demands of this moment,” Doven says…

Last month in Homer City, the smokestacks of the generating facility were brought down, and all believed that hope was lost for the little village and the surrounding Indiana County. A week later, the newly formed Homer City Redevelopment announced the plant would be redeveloped into a $10 billion artificial intelligence and data center with a massive on-site natural-gas-fired power plant that would rank as one the largest capital projects in Pennsylvania history.

Today, the shovel-ready project is already humming. There are projected to be more than 10,000 construction jobs along with 1,000 direct and indirect jobs permanently on the site or serving it — jobs that include scientists, engineers, artificial-intelligence managers, physicists and chemists, all the classic foundations of the American workforce.

The site will have seven natural-gas-powered turbines that will provide 4.5 gigawatts of power to drive the energy needs of AI hyperscale data centers on the new campus. That power will come from the Marcellus Shale. The AI intellect will come from the universities. And though conventional wisdom would have you think these projects would come from Silicon Valley, they will instead come from the rolling hills of Appalachia.

We are in another Drake moment — only this time Rockefeller and Carnegie aren’t leading the revolution, it’s Rice, Steffee and Doven, the innovators, leaders and artisans who will go down in history as being at the heart of it.

The Ukrainians rewrote the rules of warfare again on Sunday. The Russian high command must have been as shocked as the Americans were in 1941 when the Ukrainians carried out a surprise attack against five Russian air bases located far from the front — two of them thousands of miles away in the Russian Far North and Siberia. The Ukrainian intelligence service, known as the SBU, managed to sneak large numbers of drones deep inside Russia in wooden cabins transported by truck, then launch them by remote control.

President Volodymyr Zelensky claimed that Operation Spiderweb, as the Ukrainians are calling it, destroyed or disabled a third of the bombers Russia has been using to launch long-range cruise missiles against Ukraine. Among the Russian planes that were hit, reportedly, were Tu-95 and Tu-22 bombers and A-50 airborne early warning and control aircraft, akin to the U.S. AWACs. (There is no independent confirmation yet of the damage.)

Little wonder that Russian military bloggers rushed to compare Sunday’s attack to the one on Pearl Harbor 84 years ago. The analogy is inapt in that, while the Pearl Harbor attack signaled the start of a new war, the airfield attack against Russia was simply another attempt by Ukrainians to defend themselves against the unprovoked war of aggression launched by Vladimir Putin in 2022. But the analogy might make sense in that both attacks could signal the obsolescence of once dominant weapons systems: battleships in 1941, manned aircraft today. Swarms of Ukrainian drones that probably cost tens of thousands of dollars to build in total might have inflicted $2 billion of damage on Russia’s most sophisticated aircraft.

In the process, the Ukrainians revealed a vulnerability that should give every general in the world sleepless nights. If the Ukrainians could sneak drones so close to major air bases in a police state such as Russia, what is to prevent the Chinese from doing the same with U.S. air bases? Or the Pakistanis with Indian air bases? Or the North Koreans with South Korean air bases?

Tulsa Remote pays selected workers $10,000 to move to Tulsa and stay for at least one year. The program screens applicants, giving preference to high-salary tech workers, and provides extensive support services to integrate workers and their families into the community and encourage them to start new businesses.

Key to the overall benefits, Bartik finds, is that Tulsa Remote attracts workers who would not have moved there otherwise: 58 to 70 percent wouldn’t have come without the incentive. That’s a high success rate compared to other economic development tools, such as business tax incentives. A business tax incentive of the same cost per job as Tulsa Remote would only entice 6 percent of businesses to build or expand in Tulsa that wouldn’t have done so otherwise.

Bartik’s calculations show Tulsa Remote to be six times more efficient at creating jobs – with a cost of $36,000 per job it brings to Tulsa – than typical business incentives’ $218,000 cost per job created. He attributes the difference to remote workers’ mobility – they can settle anywhere with broadband – while businesses have more barriers to uprooting.