Energy Prices and Inflation
Peter Nielsen

Peter Nielsen

Peter’s Perspective – Energy Prices, Inflation, and Market Reactions

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When people talk about market risk, they often reference Nassim Taleb’s book “The Black Swan.” A “black swan” event is one that is extremely rare, hard to measure but exerts a materially negative impact on capital markets. By contrast, Michele Wucker coined the term “Gray Rhino” to describe obvious risks that are being ignored. I think several gray rhinos present unappreciated downside risks for investors as they start looking into 2022. Chief among them are energy prices. In Europe, a prewinter shortage of natural gas has resulted in a sharp spike in energy prices. The UK is so concerned that Prime Minister Boris Johnson has enlisted the aid of the army to help ease the fuel shortage. In China, they are so worried about winter energy supplies that the government has ordered energy companies to increase reserves, at any cost. All this is naturally pressuring energy prices across the globe. Crude oil prices have surged in recent weeks. European natural gas import prices are trading at an equivalent of $190 a barrel – something the oil market has never seen. Even coal, despite shrinking demand over the last several years, saw prices surge to a record.

As economies slowly recover from the pandemic, we find ourselves in an environment characterized by rapidly rising demand and sometimes limited supply. For example, a lack of semiconductor chips has limited the ability of car companies to manufacture enough motor vehicles to meet demand. Despite the supply-demand mismatch, investors have greeted rising aggregate demand as a reason for confidence in future economic growth. Unfortunately, elevated energy costs have a way of destroying demand as it effectively acts as a “tax” on consumption. In the past, this has weighed on stock returns. For example, in 1990 crude oil prices spiked from $16/barrel to $41/barrel (inverted line below) resulting in a multi-month decline in stock prices.

Evidence from global equity markets indicates that momentum is waning even as commodity prices march higher. The proverbial gray rhino of spiking energy costs suggests that 2022 earnings will likely be lower than analysts currently forecast. Despite this, there are few credible alternatives for investors as elevated inflation punishes bondholders by eating away at the spending power of their capital (table below). Even though stock investors may be facing a challenging environment, the asset class is still the “prettiest girl at the dance.”

Investment Advisory Services are offered through Independent Solutions Wealth Management, LLC, an SEC Registered Investment Adviser. All opinions expressed by Peter Nielsen are solely Nielsen’s opinions and do not reflect the opinions of Independent Solutions Wealth Management, LLC (“ISWM”). You should not treat any opinion expressed by Nielsen as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion for educational purposes only and does not constitute investment, legal or tax advice, an offer to buy or sell any security or insurance product; or an endorsement of any third party or such third party’s views. Nielsen’s opinions are based upon information he considers reliable, but neither ISWM nor its affiliates and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. Nielsen, ISWM, its affiliates, and/or subsidiaries are not under any obligation to update or correct any information provided on this website. Nielsen’s statements and opinions are subject to change without notice. No part of Nielsen’s compensation from ISWM is related to the specific opinions he expresses. Past performance is not indicative of future results. Neither Nielsen nor ISWM guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment discussed. Strategies or investments discussed may fluctuate in price or value. Investors may get back less than invested. Investments or strategies mentioned may not be suitable for you. This material does not take into account your particular investment objectives, financial situation, or needs and is not intended as recommendations appropriate for you. Before acting on information, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from an investment adviser.

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stock market thanksgiving meeks

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