Welcome to the crazy
The fourth quarter of 2023 was one for the ages. There was so much going on that it was overwhelming to keep track of and watch. We continue to have the war in Ukraine, which looks to be a one-sided affair with Russia methodically gaining ground and Ukraine occasionally lashing out.
We also have a full blown war in the middle east which has led to the partial shutdown of the Suez canal by the Houthis in Yemen. This is one of the most important shipping lanes in the world. These boats now have to traverse around the Cape of Good Hope in South Africa. I’ve seen some back of the napkin analysis on x (the platform formerly known as twitter) estimating an addition 500k barrels of oil a day are going to be needed because these ships are going to have to go the long way around to get to Europe.
In addition, the US is now setting records for the amount of oil it is producing and the amount of LNG it is exporting. The reason we can’t have gas stoves in the US is because that LNG needs to go to Europe to keep the charade going. This is a pretty awesome time to be an LNG shipper. I’ve been watching FLNG and they are paying a very nice sized dividend.
It is hard to tell how long this can last for FLNG or if there is an opportunity for capital appreciation. I have no position at this time.
In addition to the above, we also had some market news that shot the indices through the roof to end the year. The mainstream press got everyone hot under the collar with pivot talk. The Fed’s final FOMC meeting of the year came with participant economic projections which included a projection of the Fed Funds rate. Some joker on the board (looking at you Mary Daly) skewed the results.
It has now influenced the market which got picked up by the CME’s FedWatch tool.
The market is now anticipating 6 rate cuts in 2024.
The Fed’s December meeting minutes came out January 3rd and the market is going to have to re-adjust it’s expectations. I don’t believe we will see 6 rate cuts and this will cause volatility over the first half of the year as the market adjusts. In addition, I believe the Fed will be hard pressed to cut past June. As the presidential election cycle heats up, the Fed is going to want to stay as far away from that battle as possible. Cutting after June may put a target on their back which could rope them into the election circus and make them look political.
In addition to the pivot talk, there was a rally in US Treasuries that was quite impressive.
The 10-year treasury (which is one of most important financial instruments in the world), went from 5% down below 4% in less than 8 weeks. If you are not familiar with bonds, it is hard to appreciate how extreme that kind of move is. My belief is that when the market starts to figure out that we aren’t getting 6 cuts in 2024, bond yields will creep back up to test that 5% line once more.
I’m still a believer that Powell meant what he said and that he intends to hold interest rates higher for longer. I believe that the pivot talk is a desperate attempt at forcing his hand by skewing the stock market. If nothing else, this year will be a crazy one.