Hope Is Now a Strategy

Welcome to This Week’s Leyendecker View

Awareness, not age, leads to wisdom.
–Publilius Syrus

A BIG THINK

Hope Is Now A Strategy

As I wrote in a previous Big Think essay, the lowering of oil, gas and energy prices seems to have been the primary influence that eased inflation.

The cost of energy is an input into every product created and service provided, so when energy prices rise, a rise in goods and services prices should naturally follow. And since June 2022, when inflation and the price of oil hit their highest points, the price of oil and the inflation rate have been falling. In addition, natural gas prices plunged 63% in 2023.

So if the price of oil, or the price of energy, is the major influence on inflation, then the obvious question is: Why did central banks around the world increase interest rates? Why didn’t they just let the oil/energy supply-demand dynamic shift to an oversupplied situation? That’s why the price of oil fell, which is why inflation then fell.

It doesn’t appear that higher interest rates measurably slowed down the US economy. Consumers, the job market and even corporate profits have remained reasonably resilient. But higher interest rates have caused considerable pain to private owners of financial assets, things like commercial real estate and private equity portfolio companies.

There’s a traditional relationship between interest rates and the value of private financial assets. The lower the cost of capital, the more valuable the cash flow created from a financial asset. Conversely, as the cost of capital rises, the value of an asset’s cash flow declines.

So what higher interest rates have really done is reduce the value of all manner of commercial real estate, particularly office buildings, as well as the value of all manner of private equity portfolio companies.

This is a particular problem for investors who acquired their assets when the cost of capital was at its low point, which was March of 2020, when the Fed Funds rate was zero.

Investors who invested in financial assets between 2019 and 2021—before interest rates began to take off and reach today’s much higher rates—have seen the value of their investment decline, considerably in some cases.

Wouldn’t the Fed have known this was going to happen? They certainly know as well as anyone what happens to the value of financial assets as rates go up and down.

So let’s return to the question: Why did the Federal Reserve and other central banks increase interest rates to fight inflation when actual inflation likely had more to do with the price of oil and energy?

Was the Fed actually trying to let the air out of the ballooning value of privately-held financial assets? If that’s the case, then owners of private financial assets must be hoping and praying the Fed reduces interest rates soon and by a great amount. But there’s going to be a catch…

The Fed will drop interest rates when the economy weakens enough to require financial stimulus. So financial asset owners may soon see lower interest rates, but they will likely come about because the operating results of their financial assets are also waning.

THE ECONOMIC VIEW

Jamie Dimon unconvinced of soft landing
Will 2024 be a disappointing year?

US national debt hits a record
A record to be proud of?

Credit card delinquency rate keeps rising
What about buy-now-pay-later debts?
As corporate bankruptcies grow

THE INFLATION BOGEYMAN

Inflation ticks up in December
This is not conducive to rate cuts.

Shipping costs are surging
When will this show up in inflation?

Is insurance inflation out of control?
Lots of people can’t afford it.

Will the good news on inflation last?
Keep an eye on energy prices.

THE LABOR VIEW

December job gains look good
Too good for the Fed to cut rates?
Companies are not really firing yet

2024 wage increases could be decent
But not as good as 2023.

Break free from stagnation at work.
Recognize the “performance paradox”

MEANWHILE IN EUROPE

France’s prime minister resigns
Macron is struggling
He fumbled the ball with Africa
New prime minister is only 34 years old

Spain confirms nuclear power phase-out
They’d rather sweat or freeze to death.

German farmers are protesting
Bureaucrats make farming more expensive.

THE GLOBAL GAME

The EU tax on “dirty” imports
Could fragment global trade

Global economy is really struggling
According to the World Bank.

The global elections to watch in 2024
In case you like being stressed out.

THE UKRAINE FIRE

Ukraine support is faltering
Is the West going to abandon Ukraine?

Seizing Russia’s frozen assets
Is it the right move?

Moscow gets China’s support.
Advanced machine tools exports soar

THE GAZA FIRE

Hezbollah launches major rocket attack
Houthis launch first drone boat attack
And then more
India sends in a destroyer
Israel kills Hezbollah commander
Is a broader war inevitable?
Are US-UK strikes in Yemen coming?
Apparently so
War expands across the Middle East.

Israel’s post-war Gaza plan
Israel will be in charge of security.

THE NEW COLD WAR

Russia sets oil drilling record
So much for Western sanctions.

Germany lifts hold on fighter sale to Saudi Arabia
Time to arm the “good guys.”

China sanctions 5 US defense firms
For selling stuff to Taiwan.

FINANCE

ESG, the latest dirty phrase in the US
Even BlackRock is backing away
New ESG funds plummet
It’s about time!

The bitcoin ETF is finally here
Gamblers, money launderers and bad guys cheer!

The annual Howard Marks letter
Oaktree founder ponders the future.

The bond market rally
Might be forgetting massive global debt

REAL ESTATE

Office vacancy rate hits record
Who really wants to go into an office?

The 40 coolest neighborhoods in the world
In case you’re itching for a move.
Top spot to buy in the US is Buffalo, NY

A new way to build affordable homes
Can this Maryland example be replicated?

TECHNOLOGY

A CES cheat sheet.
16 new gadgets to put on your radar
Is Rabbit the next must-have gadget?

Meta says it will restrict teen content
Can we trust them?

Apple to start selling Vision Pro
But consumers don’t like VR
While Meta ditches VR of AI
China cracks some of Apple’s tech

THE CHAT ON AI

ChatGPT store debuts
Get your custom chatbots here.

Generative AI could hurt black Americans
So suggests McKinsey.

Microsoft puts AI key on keyboard
How big is this change?

THE NEXT NORMAL

Non-alcoholic spirits are booming
Gen Z is staying sober.

2023, a record year for sports viewing
What’s that about bread and circuses?

The world has a sleeping problem
Maybe it’s just the Western world.
Health problems Americans worry about

THE WAR ON CARBON

China O&G output at record high
Hydrocarbons are still very important.

US oil & gas production starts to decelerate
Did prices hit a trough in 2023?

US is now top global LNG exporter
The world needs more energy.

THE NEW ENERGY TRANSITION

Has Japan made a solar breakthrough?
China’s solar dominance may be over.

Uranium rally still has fuel
An Idaho lab is testing a 50-year-old idea
Is there still hope for nuclear energy?

Portugal tries a water battery
Pumping water up a hill sounds costly.

THE EV DREAM

Used EV prices are plummeting
Who wants to take a risk on spent batteries?

Ford auto sales grew 7.1% in 2023
But it wasn’t because of EVs.

Watch out EVs.
Here comes the solar car

THE CHINA SYNDROME

Taiwan unification is “historically inevitable”
According to Chinese President Xi.
There is no room for Taiwan compromise
Says China’s top envoy.
The Taiwanese are not in agreement
China uses disinformation as a weapon

China is world’s largest auto exporter
Selling both ICE and EV vehicles.
While slump hits Western automakers in China

China’s youth are giving up.
Quitting the rat race, “Let it rot”

THE WASHING-TONE

Congress agrees on a budget
But will it pass in time?
What’s the deficit going to be this year?

Why is Biden harassing Elon Musk?
Is he a threat to democracy, too?

The S&P 500 had a great year.
As investors, members of Congress had a better one

MAKING A BETTER YOU

How long does it take to get fit again?
Do you even care?

Chasing happiness leads to misery
Better to seek a life of contentment.

Is age biological or psychological?
Not sure my brain would get me up Mt. Everest.

HOW ABOUT A BREAK

The 100 best photos ever
Not manipulated by a computer.

A romantic relationship is a waste of time
According to many in Japan.

Noise pollution
Could take years off your life

SONG OF THE WEEK

The Wesleyan Spirits sing “Insomnia”
In a cappella. Go, Gen Z, go!

CASTING AROUND THE PODS

Jimmy Page turned 80 this week.
Famous artist Jeff Koons interviews him.

VIDEOS OF THE WEEK

Society of the Snow trailer.
A true story of survival.

Don’t mess with The Beekeeper.
Jason Statham hates bad guys.

The Sydney NYE fireworks show
Spectacular, in case you missed it.

FROM THE HEADHUNTER’S KITCHEN

It’s that time of year…
Classic beef stew
Or how about…
Classic beef bourguignon
Or…
Perfect pot roast
Pair with…
Butternut squash mac and cheese
Creamy parmesan polenta
Best Brussels sprouts of your life
Finish things off with…
Homemade coconut cream pie
Or…
Apple crostata

THE RANDOMS

If US consumers spent 2023 partying like it was 1999, then maybe recessionary risks are just now starting to build.

In early 2023, most forecasters thought oil prices would rise. Instead they fell. Today most forecasters think oil prices will remain low. Will they be right this year?

Carbon emissions are dropping in Germany and Spain. Are these countries leading the march against climate change, or are their economies in the ditch?

For years I’ve said there are two ways to make money investing. You can buy low and sell high, or you can buy high and sell higher. It now looks like 2022 was a buy-low period. When’s the next one?

According to data from the World Values Survey conducted between 2017 and 2022, a large share of people around the world believe that protecting the environment is more important than supporting economic growth. However, if you read the “fine print,” you’ll notice the poll asked people 16 years or older. Now how many people in the 16-to-25-year-old segment are going to be more familiar with Greta Thunberg than they are going to be with how the economy actually works? Yet polls like this can have an influence, potentially on policy and certainly on broader perceptions of what most people of all ages believe. What good are polls like this when they bury the details (as was done in this recap of the data) and potentially mislead? Or perhaps the more important question is, what harm can they do?

One of the greatest strengths of our country is that federalism gives states enough rope to try out new and unique policies. Oregon’s decriminalization of hard drugs has created larger addiction and greater social problems. Minnesota’s defunding of the police led to much higher crime. Will we soon learn that California’s anti-hydrocarbon policies will also produce greater problems?

We all know the saying: Necessity is the mother of invention. But what we may not know is that necessity is also the mother of get up and get after it. There’s nothing like a great challenge to unleash great human effort.

IN CASE YOU MISSED IT

Is Leadership Overrated?
January 5, 2024

Is Order the Anomaly?
December 29, 2023