“It is very important to not think about losing.” -Venus Williams
I’ve become somewhat of a tennis fanatic in my middle age. Not to say I’m very good, but it is a game I thoroughly enjoy playing and studying. The most interesting thing to me about tennis? The mental side of the game.
I’ve played opponents that were much younger, more athletic, and better skilled and managed to beat them consistently. That’s where the psychology of the game comes in. If you fret over every unforced error, or can’t maintain your consistency after going down a game or two, you’ve already lost. You're toast.
Venus Williams' quote really struck home with me. It applies to tennis of course, but it also has applications more broadly to life and investing. As we entered this investing year, I certainly wish I would have internalized it. This has been one of our more epic and obvious #Quad4 calls, but in my own personal investing I only did so-so.
As I review the past six months or so, in an effort to improve my performance going forward, this fear of losing looms front and center. Rather than fully investing in our thesis, I allowed the fear of losing on trades (and losing money in general) to creep into my head. As a result, I took on less risk and put less capital into our #Quad4 call, despite the clear strength of our thesis.
But the beauty of investing, much like sports or other areas of competition, is you can study your results after the fact. Then you can make important changes in both mindset and strategy going forward. We will always have bad trades, blown shots, and missed opportunities . . . and that’s fine so long as as we learn from them. Don’t become scared to play the game!
Back to the Global Macro Grind . . .
By the time you receive this note, or shortly thereafter, U.S. CPI will have been reported. With that incremental data point, new narratives will begin. If it is lower than expected, we will hear that inflation has peaked. If it is higher than expected, people will say the Fed will have to accelerate its tightening path. Of course, it may also be a nothing burger and come in-line with expectations.
In reality, we should probably just prepare ourselves for the fact that CPI is going to be elevated for an extended period of time. One needs to look no further than a chart of the CRB Index to get this point. In aggregate for the month of May, the CRB Total Return Index is up some 50.3% Y/Y. Interestingly, this is almost exactly the amount it was up for April.
In the Chart of the Day below, we highlight the CRB Index going back two years.
The key takeaway is that there will be relatively easy comps for the CRB Index into Q4 of 2022. Eventually the comps will ease, absent a super spike in commodities, and CPI will likely decline faster than the market and linear economists expect. That will come, as it usually does, after the Fed has overstayed its welcome on the hawkish policy path.
Circling back to the idea of a commodities super spike, let’s focus on oil for the time being. We are at an interesting time for this critical commodity. Let’s consider U.S. inventory:
- Crude Oil – 416MM barrels and down -12% Y/Y;
- Motor Gasoline – 218MM barrels and down -10% Y/Y;
- Distillate Fuel (Diesel) – 109.0MM barrels and down -21% Y/Y; and
- Crude Oil in SPR – 519MM barrels and down -17% Y/Y.
These inventory levels are near decade lows and near all-time lows on days demand basis. The story is similar for much of the OECD. Higher prices should slow demand, but watch these global inventory numbers closely. As OPEC General Secretary Barkindo said earlier this week:
“OPEC is running out of capacity. With the exception of 2 -3 members, we are all maxed out. The world needs to come to terms with this brutal fact.”
So, oil inventory is extremely low and if you believe Secretary General Barkindo supply capacity is constrained.
But there is nothing like demand to cool a commodities super spike. Higher prices will curb demand to some extent. So, of course, will slowing economies. On that front, if central banks are good at anything, they know how to slow demand. Consider the U.S. Housing market as of late. This week mortgage purchase applications came in down -21% Y/Y!
Not even the most creative central bankers in the world can print more oil. But they sure can curb demand by slowing economic activity with tighter financial conditions. Despite what today’s CPI print brings, we are likely only in the early stages of this global monetary tightening regime and #Quad4 conditions.
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
