YOUGHAL, IRELAND – The subject this week is transformation. And zombies.
The Biden Bunch wishes to transform the government, making it bigger and better than ever. To make a long story short, what they are really doing is zombifying the whole country.
But the transformers are on the march everywhere.
Path of Righteousness
Each group has its bugaboos…
The “anti-racists” are trying to transform the human mind… No more shall we have the prejudices and inequalities that come so naturally to us all.
Vegans are trying to transform the human diet… Say goodbye to those beef steaks and “Got Milk” slogans… Not only would this stop the exploitation of animals, it would also stop all that cow flatulence that is destroying the planet.
Democrat activists seek to destroy the last vestiges of the Republican Party, giving themselves a permanent lock on power.
Republican activists hope to rise again… and put the country back on the path of righteousness… or, at least, Trumpeousness.
And activists wish to transform the oil companies into clean energy companies.
For us, this is not just a matter of academic curiosity. Our Trade of the Decade features oil and gas on the long side (we’re short the U.S. dollar on the other side).
How are we doing? Keep reading…
Just because activists target an industry doesn’t mean it’s a bad investment. Capitalists connive… and capitalism survives. It goes about its business the best it can, swatting every curve ball that comes its way.
Remember, government is inherently reactionary… always trying to protect the old elite who control it. So, the more the feds “transform” an industry, the more the insiders are likely to profit.
We looked at the tobacco companies yesterday. And our old friend Chris Mayer pointed out that the transformation wrought by activists and regulators didn’t harm investors in the Big Tobacco companies one bit.
In 1998, the Tobacco Master Settlement Agreement required America’s four major cigarette companies – Philip Morris, R. J. Reynolds, Brown & Williamson, and Lorillard – to pay a minimum of $206 billion over the next 25 years to settle the medical claims against them.
Then in 2012, The Tobacco Atlas reported: “Tobacco Industry’s Profits Greater Than Ever.”
How could that be?
Consequences of Activism
When activists or the feds target an industry, the first consequence is that money turns away from the sector. Fearing higher taxes, bad press, or stricter regulation, investors move on.
Nobody starts a new cigarette company when the feds are trying to ban smoking. And few investors are going to put their money into building new oil rigs when the feds are insisting on going “green.”
This has the effect of making the existing capital – already invested in the industry – more valuable. No new competition, in other words; higher profits.
The second consequence – which is why we are so bullish on energy – is that the lack of new investment means supply goes down.
But today’s standard of living depends largely on the dense energy in oil and gas. Over time, uranium, hydrogen, solar panels, and windmills may play bigger roles. But for now, it’s oil and gas we use.
And with new competition largely eliminated… and little growth or fresh investment… the oil companies will be more profitable than ever.
But they will be transformed, too – into zombies.
Output will fall… Demand will continue to increase… And prices will rise. (Later, activists and the feds will blame the “greedy” oil companies for raising prices.)
Gasoline use has already returned to pre-COVID levels in the U.S.
And our oil and gas investments are up more than 50% since the beginning of the year. So far this year, oil is the best-performing sector.
Not only are investors anticipating higher profits, they’re also looking to oil and gas to protect them from inflation.
Once you’re pumping oil, your capital expense is “sunk.” You can keep pumping until the well goes dry. And you can easily keep up with inflation by adjusting prices upward.
Yes, that was a big story last week, too – inflation.
When the supply of goods and services goes down (thanks to the zombification of the economy) and the supply of money goes up (in the 12 months of the COVID-19 hysteria, major central banks added nearly $10 trillion to their balance sheets)…
…Mr. Market rations those aforementioned goods and services by raising prices.
Which leads us to more footnotes in our Chronology of a Declining Economy.
The U.S. budget deficit last year was $3.2 trillion… or 14.9% of GDP.
(For comparison, Argentina, with 50% inflation, had a budget deficit last year of 8.5% of GDP.)
And now, Joe Biden has proposed a $6 trillion budget. Inflation is now government policy – intentional… deliberate… and disastrous.
The Financial Times is on the story:
Key inflation gauge registers big jump in the US.
A US inflation measure closely watched by the Federal Reserve posted its biggest year-on-year jump since the 1990s in April, rising more than expected and fuelling concerns about price increases.
This is the Personal Consumption Expenditure Index (PCE) they’re talking about. It’s now going up at 3.1% year-on-year. (The Consumer Price Index, CPI, another important inflation measure, rose at a 5% annual rate during the first quarter).
Which is not so alarming in itself. But it heralds the inflation trend we expect.
Combining the latest figures for CPI and PCE, the statistical glop “gives off a faint whiff of stagflation,” said Paul Ashworth at Capital Economics.
Even over here, drifting across the crystal sea on the North Atlantic wind to our current Diary headquarters in Ireland, the smell of zombies is unmistakable.
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