Whodunit?
Who is responsible for record-high oil prices and record-high inflation? President Biden calls it “Putin’s price hike” and blames oil companies for profiteering, to make his argument more convincing. As for inflation, Biden blames broken supply chains, that is lockdowns in China, while Powell sites the economy that is too strong (from excess fiscal stimulus or money printing by Biden?). Biden’s approval rating of 40% implies that many people think he has done it. At the same time, among Democrats Biden’s approval rating is 70%, a high number, meaning that half of the country does not hold Biden responsible. Or maybe they are they are OK with high gas prices and expensive groceries? But what about European leaders, maybe they did it? Macron’s approval rating was 40% in April, and he lost his parliamentary majority afterwards, which is telling us that the French think that he did it. Chancellor Scholz has domestic approval rate that is not much higher than Macron’s, indicating that the Germans think that Scholz did it. But maybe neoconservatives did it? In a recent article, professor Jeffrey D. Sachs argues the war in Ukraine, which contributed greatly to high gasoline prices and inflation, is a project of neocons (link). The essence of the article is that neocons have provoked Russia into this conflict, and given their record in Serbia, Afghanistan, Iraq, Syria, and Libya it is hard to expect a better result in Ukraine. Prof. Sachs may have a point: Victoria Nuland, Biden’s Under-secretary of State in charge of Ukraine, whom Prof Sachs calls “neocon operative par excellence” is rather famous in Russia. The images of Mrs. Nuland distributing cookies to Ukrainian protesters during civil disturbances in 2014 are shown on Russian TV pretty much every other day. Mrs. Nuland is such a recognizable name in Russia that she even got profiled in a popular Russian instructional book “How to Have Fun and Make Money with an Oligarch of your Choice” (I did not make up any of this). The book treats Mrs. Nuland’s political achievements in a superficial and condescending manner and unlike the article penned by Prof. Sachs cannot be recommended to a serious reader. Prof Sachs ends his article with a dire warning that under Trump the situation may get even worse. Nonetheless, prof Sachs is not accusing the former president of any misdeeds hence we can conclude that Trump did not do it and should not be blamed for high inflation or gas prices. In my view, since both phenomena have been created through a concerted effort of many players, we should not expect a reversal anytime soon.
Crossing the Nord Stream?
Germany, having seen a substantial cut in supplies of Russian gas, is preparing for rationing. The question is who will bear the impact, the households (the electorate) or the industry (the donors)? I think that German politicians should not be surprised if Russian supplies get restricted: Russia has invested a lot of capital in natural gas production and transportation on behalf of European consumers and facing a quicker than expected phase-out of all natural gas purchases by the EU may get upset to the point of making an emotional rather than a rational decision and cut supplies before the end of the phase-out. In case Russia is counting on retaining some of the energy business in Europe we may consider a couple of scenarios. Nord Stream scheduled maintenance should be over by the end of July but may get extended, under the pretext that the necessary parts are not available due to sanctions. I think that if the Russian military is successful in advancing to the border of DNR (the LNR territory has been captured already) by the end of July and the Ukrainian government decides to negotiate a ceasefire agreement, there is a good chance that Russia will continue to supply Germany with natural gas. If the Russian military fails to advance to the border in this timeframe, or if Ukrainians refuse to start negotiations, there is a good chance that supplies to Germany will be cut to zero. If so, the German economy will suffer yet another negative shock, which could also trigger a pan-European recession.
Bombed-out names.
Many industrial stocks have declined to reasonable valuation levels.
General Electric (GE). I think that relative to the broad-based market index the stock has limited downside. Over the past few years under CEO Culp the company was making operational improvements, which should lead to better profitability/accountability. I like the improving prospects of the Aviation business, opportunities for further deleveraging, and attractive valuation. I think that the pending spin-offs of Healthcare and Renewables/Power could become a catalyst for the stock.