Opinion Welshcake

Welshcake

Fears of a hard landing have taken credit spreads back towards their 2020 pandemic peak, with US CLO triple As passing 200bp. But while signals abound for national recessions, if not a major global downturn, one of the biggest contributors is being taken too much for granted.

Here in Wales the problem is acute but mystifying. As a nation we produce 90% more electricity than we use, yet our household bills are among the highest in the UK. Diesel can cost £2.09 ($2.53) a litre — which is rather more than the $5.79 a gallon ($1.27 a litre) paid in the US, if anyone over there wants something to feel better about.

Housing is in a real (e)state

If anything is to be salvaged from 2022 the economy needs a hero — and quickly. That won’t be the Fed or ECB. But so intense is the confluence of economic pressures that something may give way with dramatic consequences. And the biggest upside shock could be a candidate most playbooks define as the villain of the piece: energy.

Oil prices seem intransigent, but many variables go into them — and just recall where they were at the start of the year. Mean reversion is surely as relevant to oil as anything else.

Politics is a massive variable. If anyone knows a thing about pressure right now, it’s US president Joe Biden. His tenure has drawn few plaudits, having presided over massive government spending, the Afghanistan debacle and then, in recent weeks, a highly charged firearms bill and the disaster of the Supreme Court’s overruling of Roe v Wade. With at least 22 states moving towards abortion bans, Americans are more divided than ever. And Biden, with mid-term elections looming, desperately needs a win.

No wonder he is throwing himself at oil: scheduling a July trip to Saudi Arabia; cutting oil taxes and wrangling with US producers; entertaining a rapprochement with Iran and Venezuela; backing Mario Draghi’s idea for a price cap on Russian oil. But the likelihood of success is slim — and it could be divisive.

US demand is another big if as conditions tighten — although historically consumers have shown little desire to cut fuel consumption. Non-US demand could also come into play, particularly if China’s growth slows further.

Any of these factors have the potential to change the rates picture completely, particularly if oil falls back below the psychologically important $100 level. Fed reactivity is hard to quantify, but a ‘positive’ shock could bring its own brand of pain to credit, given many strategies are overweight commodity producers versus consumers, as well as overweight non-cyclicals.

But don’t worry about me. I’ll still be able to moan about the price of a pint in the Tanronnen.