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Oil Sees Strongest January In 30 Years

Crescat's Tavi Costa points out something remarkable which many may have missed amid the short squeeze and "growth" stock frenzy: oil, that "value" age relic, has had its best YTD performance in 30 years. As Costa puts it "commodities are leading the way and the inflationary thesis keeps building up" (incidentally none of this is lost on those long XOM which is not only the most levered - for better or worse - way to bet on rising oil prices but pays a generous 7%+ dividend while waiting for Warren Buffett to announce that he has amassed a 10% stake).


In any case, those following the reflation theme better pay attention, because with crude oil prices joining their commodity cousins in repairing the pandemic damage, inflation rumblings are getting a little louder which means that the day central banks may be forced to tighten financial conditions (perish the thought) is nearing once again.

Related Video: The Silver Squeeze Conspiracy

Of course, with every major developed economy still printing headline and core inflation below 2%, this is not today’s problem, but there is a reason for that: metrics such as CPI and PCE are politically convenient measures that strip away virtually all basket components whose prices are surging to give central banks leeway to pursue politically acceptable policies of reflating all assets (until the bubble bursts, but by then that will be some other politician's problem).

Still, as BMO's Doug Porter shows, the year-over-year rise in a basket of commodity prices (and they mostly all show a similar pattern) is now a bit above 25%. This is a problem because in the past 20 years, that’s been consistent with headline inflation of just under 4%... or rather, it would be a problem if government headline inflation data actually reflected the reality of prices.

That said, Porter notes some caveats and cautions that some of the biggest misses (where commodities popped and inflation didn’t) were immediately after recessions. That’s because there is still so much slack in the economy that cost increases don’t get fully passed along. (Note especially 2010/11.)

Still, as the BMO strategist concludes, "barring a fast fall in resource prices, it looks like the days of sub-1% inflation are rapidly drawing to a close."

By Zerohedge.com

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  • George Doolittle on February 08 2021 said:
    Higher oil prices historically are very recessionary for the US economy but indeed the USA is by far the World's largest energy producer and now exporter going on many Years. As well the US economy has over the past 20 Years become far less impacted by higher oil prices thanks in large part to the massive boom in natural gas production and exports as a substitute. Moreover the US transportation sector continues to see dramatic improvement in fuel economy especially given the "pandemic" grounding of much of the US Airline Fleet but also of course the boom of all electric battery powered transportation combined with the likes of Uber and Lyft. Plus the USA is a massive producer of ethanol so I would be very wary of chasing higher oil prices ever higher going into March.

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