The Oil Price Drives All Other Prices

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Market On Open, Friday 20 March

by Alex King, CEO, Cestrian Capital Research, Inc.

Oil, as we know, is in everything. As the oil price rises, an inflationary impulse is created which will wash across the globe in the next 3-6 months. As shipments of urea fail to make it through from the Gulf to the rest of the world, food crop yields will fall meaning a secondary inflationary impulse will run through food prices worldwide. This damage is done and there is no changing it. The task for governments and central banks worldwide now is - can the impulse be capped off and therefore genuinely become transitory, or not. This is a question about re-opening supply lines. If those supply lines cannot be re-opened any time soon, or not in sufficient volume, then central banks have a problem. Surging inflation in the monetarist playbook means hike rates. But the economic damage that arises from surging inflation means cut rates. I don’t know how this gets resolved; it seems to me the flaw in the monetarist management of inflation is that it assumes that inflation is primarily a result of excess demand ie. that people have gotten too rich or have too much access to cheap credit and are splurging on fancy watches or whatnot accordingly. I am not sure there is a playbook for globally elevated input prices.

How To Invest Successfully In Wartime

Investing and trading through this period is difficult. If you are finding it difficult, it’s not you. I mean it might also be you, ie. a skill issue (we can help you with that) but most likely it’s just difficult, because market direction right now is dominated by policy decisions and not by the ebb and flow of investor sentiment. Policy always weighs heavily on price, of course, but we are at an extreme point in that right now.

Success in investing and trading relies on finding a way to be a fast-follower, not a leader. Being a fast-follower means forming a view on to where the puck is going to go, and getting tucked in behind it on its way. Our human minds get in the way of this because we fall in love with companies or tickers or methods. We assume that defense stocks will rise during war, when in fact defense stocks tend to run up in advance of war and then sell down when shots start getting fired. We assume that leaders in the recent peacetime will be the leaders in the next peacetime. And a hundred other cognitive biases that mainly help to give other people our money.

Machines have no such biases and it’s why I always allocate a good portion of my own capital to algorithmic methods. A large number of our subscribers do the same. To those of you who are chalking up gains being in the right sectors - energy and utilites at present, previously gold and semiconductor - using our sector rotation service, congratulations. And if you’ve been short the S&P using our long/short service, kudos to you. When emotions in the world are running hot, no better a time to run cold as ice.

Let’s dig into the market at large.