Jerome, call on line 1

also, ABC Theory, METC, and SPR

The big news today is the inversion of the yield curve. During this morning’s trading session, the curve flipped, big time.

The 10-2 yield curve has been a consistent predictor of an oncoming recession. I imagine this case will be no different. What will be different this time is inflation. I’ve read in mainstream articles that a recession will stifle the inflation that is running rampant. I have serious doubts that will come true. With a recession you see a decrease in spending which translates to an increased demand for money. However, with a serious restriction in goods still taking place, the increased demand to hold cash may not be enough to do anything more than slow the current pace of inflation.

According to the Austrian Business Cycle Theory first published by Murray Rothbard and then again by Robert Wenzel, an increase in the supply of goods will increase the demand for money. However, the opposite holds true as well. When there is a decrease in the supply of goods, there will be a decrease in the demand for money. Consumers will not want to hold large balances of cash. Instead they will buy the few goods that are available. At the same time, the Fed is tightening.

This brings on a new dimension to the equation. If the Fed can manage to bring the supply of money down and the demand for money keeps decreasing, the best we can hope for are flat prices. This will be a narrow and difficult road for the Fed to navigate as they have spent the last 40 years working their money pump. I feel their best effort will be to keep the supply of money flat. Here’s my cheat-sheet:

Eventually this scenario will play out with a massive crash as the Fed will not be able to centrally plan what the interest rate should be. Economics is not a mathematical science. It is a social science. It is the study of people and the decisions they make. This is why Ludwig von Mises titled his principle work, “Human Action”. Economics is the study of praxeology and its application to economic decisions. This is what makes behavioral economics so interesting. This is all wasted on the Fed, Keynesians, and MMTers. They treat economics as a formula with an equation that must balance. When they make interventions in the market, it distorts the decisions that people make. When the distortions in the economy become too great to continue, the crash takes hold and there is a liquidation of the malinvestment in the economy. This means that unprofitable projects are abandoned.

This is the primary reason that central planning is forever doomed to failure. Frederick Hayek puts it best. His book, “The Fatal Conceit” is a must read for those who want a true rebuttal to socialist central planning.

In other economic news, Russia has been pushing for the purchasing of their commodities in their currency, the ruble. Mish had a great piece on this yesterday. He covered how Putin got his way and how the EU will pay for gas moving forward. On Tuesday, Pepe Escobar at thecradle.co outlined how Mariupol will become a key hub of Eurasian integration. In the article he states how the neo-Nazi Ukrainian Azov batallion was defeated by the Russian and Donetsk forces in Mariupol. This led to one of the biggest metallurgic coal plants in Europe coming under the control of the Donbass proto-states. These states are working towards becoming an independent republic but there are also rumors that they may choose to become part of the Russian Federation by referendum (similar to Crimea). I imagine that these proto-states see the uphill battle they face for independence and Crimea’s treatment after the referendum to join Russia. Tying Russia requiring payment in rubles together with the overtaking of Mariupol, it sets up for an exciting play on met coal and steel (steel is the combination of iron ore and metallurgic coal).

Russia is already the world’s fifth largest steel producer. By adding the Donbass and Mariupol regions, they will have a significant chunk of the global market. Anyone not wanting to deal with Russia will have few sources of steel and met-coal. This makes Ramaco Resources (a met coal producer) an exciting play. Ramaco (ticker METC), has had a tremendous run over the last year. Their earnings have picked up and they have begun paying out a dividend. I am a holder of Ramaco shares and have recently added to my holdings. I believe that if Russia plays hardball, met coal prices will continue to run hot putting upward pressure on METC’s earnings.

Finally, I want to touch on the Biden administration’s Strategic Petroleum Reserve release. The administration plans to release 1M barrels of oil on the market every day for the next 6 months. The White House’s press release stated that,

“This record release will provide a historic amount of supply to serve as a bridge until the end of the year when domestic production ramps up.”

I find two glaring problems with this statement. The first is that, yes, this is indeed historic. The administration will take the SPR down to a level it hasn’t been at in over 40 years. If the release goes as planned, the SPR will be at the lowest level all-time in terms of days-supply. This means that this release is a one trick pony and by the fall it’s trick will have been all used up. There will be no double-down opportunity.

Second, without reducing the red tape around drilling permits or removing the financial roadblocks with the ESG investing movement, domestic production will not ramp up. In fact, today on the radio I heard that the democrats want to levy a windfall profit tax on the oil companies or find a way to tax unproductive wells. This is the exact opposite of what you would want to do to spur on domestic production. I sold out of my USO calls when things got choppy in the oil market. I’ve picked up a position in Devon Energy (DVN) as I see the oil and gas exploration and production companies are starting to close the gap on the oil price.