Thursday 11 June 2020
While The Gregor Letter remains attentive to energy and climate, the focus in recent weeks has increasingly turned towards markets and the economy. Simply put, the path ahead in oil use, electric vehicle adoption, and infrastructure-driven decarbonization will be highly sensitive to interest rates, unemployment, and the reaction from fiscal and monetary institutions. So for those of you who’ve not yet subscribed, I wanted to open up the most recent letter for you to read:
Please see: Market Talk, 1 June 2020.
Interestingly, comparative analysis of macroeconomic forecasts—everything from the CBO’s multi-year outlook on GDP and unemployment, to analyst consensus on forward SP500 earnings—is not dissimilar to the work required to gauge vehicle sales in China, oil consumption globally, and the rollout of new wind and solar. Prices, and human behavior, are exceptionally controlling to these outcomes. And in recent weeks, I’ve addressed what I see as a fair amount of recency bias and overall unwillingness to face up to the standard, expected outcome of pandemics: that they are longer-term affairs, with an enduring suppressive effect on economies.
Accordingly, I’ve not been impressed at all with “Apple mobility data showing a rapid increase in route requests” as a proxy for a robust recovery in US driving, when gasoline consumption has recovered not quite half of its recent decline. Equally, a stock market that, at SP500 3200, was pricing in a heroic earnings recovery not only for 2022, but 2021, also seemed to be more of a natural disaster forecast, rather than a pandemic forecast. Just to say, pandemics are not shock-n-lift experiences. They are sustained pressure marathons. Most of all, the CBO’s projection that US GDP would be sitting in Q4 2021 just 1.6% below the 2019 level struck me as highly unlikely, given the CBOs’ companion outlook that unemployment next year would come in at 9.3%. Most incredible was the Federal Reserve’s composite forecast that unemployment would fall to 6.5% at the end of next year. Overall, I’ve been rather stunned at how many educated people (who should know better) recently allowed themselves to conclude there was something inherently self-extinguishing about the coronavirus.
Here is a recent thread, in which I summarize my thoughts on markets, and the economy:
A feature I’ve started to run in each newsletter is the base case view, and here are two central points worth making repeatedly. One, it’s best not to think of the pandemic containing one or two waves, but rather, multiple waves—likely of smaller amplitude—that will extend over the course of the next year, if not longer. The dynamic here is the interplay between the human behavioral response, and how that determines the advance-and-retreat of the virus. Second, in domains where decarbonization already had some momentum, the crisis, and its associated slow growth and low interest rates, will generally act to accelerate those trends. But in domains where progress was slow, the crisis may act to compound stagnation. Two quick examples: offshore wind construction and electrified transport adoption in Britain will both likely move more quickly. Equally, the failure in the US to curb the use of cars in cities, and the lack of any coherent strategy for emissions taxes and fees or congestion charges, will likely bog down any new policymaking. Los Angeles is a great example: a progressive city in a progressive state that still can’t find its way to doing anything substantive about cars. As the recession deepens, so too will policy paralysis.
Before The Gregor Letter pricing shifts to a higher level in July, I hope you will consider subscribing. If you have been taking the letter monthly, or if you are still not subscribing at all, you can lock in your rate at $50 for the coming twelve months between now, and 30 June. Afterwards, annual subscriptions will shift higher, to $75 per year.
Finally, the Oil Fall update is indeed in the works, but I’ve decided to wait on half-year 2020 data to complete, to make the update more useful. Just to remind, if you purchased the eBook in parts, or in whole, you will get your update for free.