Market Update
After stumbling last week, the U.S. stock market has swung back to optimism. It is not as if the inflation worries, which really dragged down markets and emotions last week, are gone; they are not. But they were soothed by additional Congressional testimony this week from Federal Reserve Chair Jerome Powell in which he said inflation, currently running at 5% annually, should dip back down to 3.4% annually by year's end. The underlying causes of the inflation - shortages in raw materials, refined materials like semiconductors, and workers - will unwind with time. On the subject of workers, Powell agreed that the interest by the unemployed to fill job openings has been underwhelming of late. This seems to stem from a different set of shortages - childcare, lingering health concerns and better wages.
“We’re digging out of a very deep hole,” Mr. Powell said. “We’ve made a lot of progress but…we have a long way to go.”
In other good news, the United Nations issued a report saying that the stellar recovery in the U.S. is attracting foreign investors again. In 2020, foreign investment here dropped by 40% and by an average 30% around the globe. But as the U.S. is flush with stimulus, spending packages and healthy consumers, this has become the place to be.
For example, Australian steel company BlueScope is spending $700 million to add another furnace and a second caster for molten steel at its mill in Delta, Ohio. Nestlé Purina Petcare, the Swiss company, is set to spend $1 billion on two new U.S. factories in Ohio and North Carolina, confident as money seems to be no object when it comes to Americans spending on their pets.
This is not great news for developing, emerging countries who need foreign investors desperately. These are the same countries that are still in the grips of the pandemic. Thus opportunities are passing them up with businesses choosing instead to invest new dollars in stable regions closer to their consumers than in areas with cheaper labor and taxes. As the Wall St Journal points out, these poorer nations rely on these investments for more than just the dollars; new businesses from overseas "bring transfers of technology and know-how", benefits which are like a rising tide that lifts all boats.
Peakish Oil
As the world continues along the bumpy road to recovery, oil production is picking up. Next week OPEC+ will meet to discuss how much more oil to drip back into the markets. Only 15 months ago an awkward and contentious meeting amongst the OPEC members and their plus-ones, mainly Russia, could not agree on production cuts as the pandemic picked up speed. Demand dropped 30% almost overnight as OPEC+ tried to convince producers that drilling should slow to support prices, though Russia said that countries should pump whatever amount suited them. By that time, prices were already down nearly 30% for the year. When OPEC+, which supplies about 50% of the world's oil, did cut, it was not enough to avoid the crash in gas.
Prices have since recovered and then some. Brent crude, the benchmark price for most oil in the world, is closing in on 3-year highs. The same goes for West Texas Intermediate, also called “light, sweet crude” and the metric the U.S. associates with prices at the pump. WTI has reached $73 after plunging deep into negative territory in April 2020.
As OPEC+ turns the taps back on and consumption is back, the conversation has come around to “peak oil” again, which was thought to have been achieved in 2019. Peak oil is when production meets its maximum. At the end of 2019, nearly 100 million barrels of oil were being produced and consumed daily. Once the pandemic hit, many thought peak oil had probably occurred in 2019 and shut the book on it.
Now it looks like 2021 could surpass 2019’s production record. Even with all of the innovation in green energy and moves away from fossil fuels, it is too soon to say that the peak is behind us. Experts think production could lift to 100 barrels per day before the end of this year given the strong demand.
For their part, producers will likely keep on pumping until their wells run dry. Take McClintock #1, the world’s oldest continuously operated oil well in Titusville, Pennsylvania. When production began in 1861, the well produced about 50 barrels a day, peaking at 175 barrels. After 160 years of operation, the museum operators still pump one barrel a day, mostly to maintain its "continuous" status but also surely just because they still can.
It. Is. Hot.
The Pacific Northwest is in the midst of some terribly hot days, especially given that it is still June, a typically mild time. The coming weekend is predicted to bring record temps and residents are not relishing the news of “triple digit weather” much like they would the excitement of snow or frosty temperatures. Reaching triple digits is extremely rare here. With the average Portland temperature at 76 degrees this time of year, Sunday’s thermometer may reach 37 degrees higher. Yet, heat waves are a regular pattern and meteorologists are pinning this undelightful weather on a heat dome. This high pressure dome of air traps heat beneath and causes the air to get hotter and hotter as the dome collapses. So while those who study these events stress that it is normal, it is still unbelievably harsh for an area of the globe that is already under a drought and facing a longer-than-normal fire season.
This also comes during a week when a draft report on climate change by a United Nations commission was leaked to Agence France-Presse (AFP). The news is grim yet sadly familiar. Unless enormous action is taken immediately, life on earth will continue its dramatic shift. One of the most shocking parts, as shared by the AFP, the only group which has apparently seen the full 4,000 page draft, reads: “Life on Earth can recover from a drastic climate shift by evolving into new species and creating new ecosystems. Humans cannot.”
Mostly what seems to be holding the world back from making immense change is the expense. Plus change is hard. It is hard to motivate individuals, let alone a country or a globe, particularly when results take a very long time to see. It does not help that experts disagree on just about everything from whether we need to restore ancient agricultural practices to the benefits of green technology.
Queue the Biden Administration’s infrastructure package, which reached the final stages of negotiation on Thursday. Considered to be our country's grand opportunity to move towards a cleaner future, the details on whether that will materialize are slim. Here's a rough breakdown of how $579 billion will be spent:
$312 billion will go to major projects like roads and bridges, passenger and freight rail and public transit
$266 billion will go towards non-transportation infrastructure like power grids, broadband and water
$15 billion will go towards electric vehicle infrastructure and electrifying school and transit buses; this is a tiny amount for "green energy" compared with initial proposals
This is all part of a larger bill that will include many of the administration's education, healthcare and anti-poverty plans.
Tax Gap
Americans are still awaiting word on how the Biden Administration intends to cover the cost of what will ultimately be a nearly $4 trillion spend as laid out in the American Jobs Plan and American Families Plan. For some it is nail biting. Tax changes are certainly on the way while polls show that the majority of Americans are actually happy just where they are.
In a recent Gallup poll, 55% of Americans said their tax bill is fair, leaning true to party demographics with 65% of Democratic participants agreeing that they pay the right amount versus 46% of Republicans agreeing. A poll from Americans for Tax Fairness found that 69% of respondents believe that wealthy families and corporations do not pay their fair share. Ultra-high net worth Americans are more prone to pay less, or no income tax at all, as the ProPublica report last week reminded everyone.
As we consider raising taxes, there is full awareness that there are plenty of people who just do not pay, or regularly underpay, their tax bills. The IRS, with broad support from Congress and the President, are itching to turn their attention to these non-compliant should-be taxpayers. Those missing dollars, called the "tax gap," are massive. For tax year 2019, the estimated gap was $574 billion.
What the IRS needs most is more funding, which it seems they will get, to hire, train and begin audits. This will take time and they are realistic. The IRS is forever up against wealthy people and corporations with complicated tax scenarios and teams of tax lawyers and accountants who mount skilled defenses. The IRS believes it can collect $140 billion over the next 8 years, not even close to the $574 billion it missed collecting in 2019 alone.
So while tax collecting is fraught with holes, it seems compliant U.S. taxpayers and corporations can expect higher taxes in the future to cover the country's bills.
Comments