by Bill O’Grady | PDF

(NB: Due to the Thanksgiving holiday, the next report will be published on December 6.)

During the 1970s, the world economy suffered through two oil shocks.  The first, in 1973, was caused by the Yom Kippur War.  The U.S. supported Israel, and the Arab states retaliated with an oil embargo.  In 1979-80, the Iranian Revolution and the Iran-Iraq War disrupted oil flows from the Middle East, leading to another oil spike.  Due to these events, the OECD, through the auspices of the International Energy Agency (IEA), created a member Strategic Petroleum Reserve (SPR) system.  This system was designed to be an emergency backup supply of oil and oil products that could be shared to prevent panic buying of oil and to ensure that the economic damage that was suffered due to the 1973 and 1979 oil shocks would never be repeated.

However, as the world moves away from fossil fuels, these SPRs could be holding inventory that will no longer be needed.  Simply put, governments that hold reserves could find themselves with worthless inventory.  Merchants often find themselves in this situation; a seasonal item remains on the shelf when a season is winding down.  A decision has to be made—cut the price to sell out the item before the season ends and lose margin or hold the good and hope that buying emerges to maintain margin.  With the SPRs, governments may face the problem of what to do with this oil in the face of falling demand.  The decisions that these governments make will affect oil prices, consumers, and producers in the coming years.

We will begin our analysis with a history of the SPRs, explaining how they work, who has them, and how much oil they contain.  From there, we will discuss the difference between a buffer stock and a reserve.  Next, we will examine the role of climate change policy on SPR management.  How OPEC+ manages its production policy in light of SPR releases will follow.  We will close with market ramifications.

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by Thomas Wash | PDF

Ever since the United Kingdom defeated the Spanish Armada in the 16^th century, it has typically kept Europe at arm’s length. The victory not only showed that the British could successfully defend itself from invasion, but that it was an important power in Europe. This newfound confidence along with the Commonwealth’s growing manufacturing prowess gave it an air of superiority over its continental colleagues. After defeating France in the Napoleonic Wars in 1815, therefore becoming the world’s superpower, this sentiment became deeply entrenched into the British psyche.

However, British sentiment took a hit after World War II. As the second war on the continent in forty years, it pushed the U.K. to the brink of collapse. Humbled, the British pursued peaceful coexistence with the rest of Europe as they attempted to rebuild their country. They not only sought collaboration with the rest of Europe but also supported greater integration. That being said, the U.K. has struggled to accept a subordinate role within Europe as it seems to believe it is superior. As recently as December 2020, Education Secretary Gavin Williamson joked that the U.K. was the first developed country to approve the coronavirus vaccine because it “was a much better country” than others.

Understandably, British hubris has often rubbed other European countries the wrong way. The underlying friction between the two sides came to a head after the European Union rejected the U.K.’s request to be exempted from the EU’s immigration program. This decision not only paved the way for Brexit but may have also set the stage for a potential trade war. In this report, we will examine the history of British-EU relations, discuss the Brexit vote and fallout, and briefly review how the relationship has changed since the U.K. left. As always, we will end with a brief discussion of market ramifications.

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by Patrick Fearon-Hernandez, CFA | PDF

Whenever a big, rich country gets a new leader, there could be potential investment implications, and Japan is no exception to this rule.  When former Prime Minister Suga announced last summer that he wouldn’t seek reelection as head of the ruling Liberal Democratic Party, the first step in Japan’s political transition to a new leader was the party’s vote in mid-September naming former Foreign Minister Fumio Kishida to take over as LDP chief and, upon a later majority vote in the Diet (Japan’s legislature), as the head of government.  Facing a legal deadline to hold new elections by the end of November, Kishida called for the next ballot to be on October 31.  Now that the LDP has won that election, giving Kishida a full four-year term as prime minister, it’s a good time to review his background, leadership skills, and likely policies going forward.  At the end of this report, we also explore the likely investment ramifications as Kishida takes power.

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by Patrick Fearon-Hernandez, CFA | PDF

Germany’s parliamentary elections in late September were momentous for several reasons.  Perhaps most important, the elections set the stage for a new leader to take power as Chancellor Angela Merkel decided not to stand for another term after leading Germany since 2005.  However, even though the retiring Merkel is likely to see her left-of-center rivals take control of the country, the coalition they’re forming may leave Germany’s key economic and financial policies relatively unchanged, with big implications not only for Germany itself but also for the broader European Union.

In this report, we parse Germany’s party structure and discuss how past coalitions have run their economic and financial policies.  We next focus on how those economic and financial policies have played out in Germany and beyond during the 16 years of Merkel’s rule, and why the current coalition talks may leave many of those key policies in place.  We conclude with a discussion of the investment ramifications if that turns out to be the case.

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