6 minute read
*This was our recent issue of the Saturday 'Morning Pour' to email subscribers - join here to get our insightful economic and market views.
In this week's edition of the Morning Pour, I'll keep it light as you are likely with family or getting that final taste of 2023.
I can’t believe 2024 is around the corner already. So much has happened over the last year but it feels like it blew by.
I guess it's like they say: time flies over us, but leaves a shadow behind.
Anyway, I just wanted to touch on a few high-quality Morning Pour editions that offered great insights in Q4-2023 – when we started publishing – and are still relevant to read but with some brief updated content.
So, sit back, enjoy your morning drink of choice, and savor this special edition of the last Morning Pour for 2023.
1. The Perpetual Game: Saudi Arabia, OPEC, And Oil Markets Are Stuck In A Prisoner’s Dilemma
Since writing this piece (link above) detailing the dilemma OPEC is in and why the Saudi-led oil cuts have only hurt them – things have looked even bleaker for OPEC.
Angola (Africa’s second-largest oil producer) announced earlier this month that they’re done with OPEC and leaving the cartel – indicating the tensions mounting as countries are frustrated with Saudi Arabia’s quotas.
See, many OPEC countries depend on oil exports for state revenues. And not all these countries have an abundance of U.S. dollar reserves like Saudi Arabia does. Hence why it’s a sensitive topic for many OPEC countries being told what they can produce (since it directly impacts their balance sheets).
Meanwhile, as of November 2023, OPEC's crude oil output accounted for1 just 27.4% of the total market, down from 32-33% in 2017-2018.
As I noted in the above article, this shouldn’t come as a surprise because you can't cut oil output (limiting supply) to try and boost prices without reducing your market share as a side effect.
Making matters worse, U.S. oil production hit a record high – hitting 13.3 million barrels as of mid-December. The rising U.S. oil output has eaten away at OPEC's market share while benefitting from the relatively higher prices (courtesy of OPEC cuts).
See the issue? They can't curb oil output to boost prices if the U.S. or Guyana or Brazil simply comes in and just pumps more oil. This is a nasty thorn in OPEC's side (specifically Saudi Arabia as their oil dominance has diminished).
I still believe there’s a greater risk that Saudi Arabia and OPEC begin flooding oil into the market (pushing prices lower) to try and regain market share and flush out U.S. oil fracking.
We've seen it happen before (remember 2015-16?).
Keep an eye on this.
2. Part One: Is A BRICS Currency A Flawed Idea? I Believe So – And Here’s Why
I believe this article (link above) does a decent job highlighting the global balance of payments (sounds exciting right? But very important) and the difficulties in the “de-dollarizing” narrative – the idea that the world is moving away from the dollar.
While many pundits make this claim, I don’t believe it’s nearly as easy as they make it out to be. Nor do they highlight how changing currencies would completely change trade flows.
Since writing that article, there’s been interesting news2 highlighting this exact dilemma. . .
India and Russia (both members of BRICS) can’t even trade oil with their own currencies (the Indian Rupee and Russian Ruble).
India, which buys a significant amount of oil and gas from Russia, insisted on settling trades in the rupee earlier this year. That's because using U.S. dollars could expose it to potential sanctions, and it worries about acquiring rubles at a fair rate on the open market.
But, Indian authorities have capital controls on the rupee, and the currency is not fully convertible — meaning it can't easily be changed into another currency.
This has irritated Russia because they’re sitting on billions worth of rupees in Indian banks that they can’t seemingly do anything with (since they don’t buy many things from India).
For it to work, Russia would either have to spend the rupees in India (importing more from India) which would decrease Russia’s trade surplus, or lend rupees (make loans) to countries or companies abroad that do.
The issue? Not many countries buy from India either (India is a huge deficit-running nation, meaning they import far more than export). So, the same problem remains.
Because of this, Russia has pushed for India to purchase their oil and goods with the Chinese yuan (which is also subject to capital controls and not fully convertible).
But India runs a huge trade deficit with China also (it reached $90 billion worth3 in 2022) – so how exactly can India even get the yuan from China? India would have to net-export more to China to get paid in yuan to then spend in Russia.
See how convoluted it gets?
Not to mention, would China want to see its trade surplus with India evaporate in order to supply India with yuan (buying more and exporting less with India)? I doubt it.
This is just an example of some of the issues within BRICS itself - ones they can’t even figure out.
My whole point in that article was showing that it’s not easy for countries to bypass a reserve currency because of these issues. And in doing so, it would change their trade flows.
Just look at the Euro, for instance: German surpluses came at the expense of Spain, Italy, Portugal, and Greek deficits which weren’t sustainable.
I believe it’s a timeless read if you missed it and are interested in these larger-scale angles (highly underrated but very important).
3. From Stability to Instability To Instability: What We Can Learn From Minsky And Soros About Markets
In this article (link above), I highlighted two great thinkers – Hyman Minsky and George Soros – and what we could learn from them regarding markets.
The gist of Minsky was that private sector debt cannot rise forever. Eventually, it becomes unsustainable.
hence why I believe the surge in U.S. consumer revolving debt is somewhat worrying.
To put this into perspective – according to a recent4 Wells Fargo report – U.S. revolving debt (like credit cards) has surged over the last two years.
To give you some context: in the previous cycle (2008-2020), revolving credit increased by $80 billion, roughly $6.7 billion annually.
But in the current cycle, consumer credit surged by $187 billion in less than four years, averaging about $46.8 billion each year.
Simply put, credit card debt has escalated seven times (700%) quicker in this cycle compared to the prior one.
As Minsky’s work showed, too much debt – and the rapid increase of it – increases the potential for a debt and deleveraging (repaying debt quickly) crisis, which can spiral.
Meanwhile, George Soros showed us with his “theory of reflexivity” that markets are essentially social systems (driven by people) and feedback loops (where the outputs affect the inputs and on and on).
We’ve seen this recently with the expectation that the Federal Reserve is going to begin cutting interest rates in 2024.
Now, interest rates are declining (which may allow cheaper debt-taking), loosening financial conditions, and may spur greater risk-taking behavior.
All this sentiment affects prices of assets which then influences fundamentals (as Soros noted).
This goes both ways – from boom or bust. So, it’s important to keep it in mind. . .
I hope you’ve enjoyed the Dunham Morning Pour series so far. It’s been a pleasure writing this.
I always enjoy investigating and reporting on compelling macroeconomic narratives and blind spots that offer potential value and conversation.
Anyway, I hope you’re ready for an interesting 2024.
Take care.
Sources:
1. OPEC faces declining demand and shrinking market share in early 2024 | Reuters
2. Dedollarization: Russia Wants to Topple US Dominance, Few Alternatives (businessinsider.com)
3. Rising India–China Trade Deficit : Policy for Bridging the Gap | Economic and Political Weekly (epw.in)
4. Wells Fargo - Credit Check: Is It Time to Worry About Credit Card Debt?
Disclosure:
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax, or investment advice or an investment recommendation, or as a substitute for legal counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy, or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.