[David] All right, Matt Graham, thank you so much for your contribution each and every week. Be sure to sign up for Matt Grahams mbs live.net. Service, it’s up to the nanosecond market updates. You can sign up with an LOL code, saves you putting in a credit card. It gives you an extended trial period, but just sign up for it. It’s a such an affordable service and it’s got such great content, especially in times on this kind of volatility. All right, let’s get in talking about the markets. Just starting off with you, bill. You sit and look at where Les Parker has been predicting rates, the range we’re in, we’re at the upper end of that. I think a lot of us are hoping for something to start riding this thing down Gangam style.
[Bill] So I’m gonna take the conversation a little bit different direction because I think there’s a lot of very narrow view of what’s going on and the impacts. And I spent a bunch of time listening to different folks yesterday, and it’s not right or wrong, it’s what’s possible that goes outside of that narrow view. And I’m gonna start it with a couple of, trait, our axioms that, don’t get a lot of attention. And the first thing is, as a trader, you need to focus on return of equity before you start paying attention to return on equity. Yeah, another one that I remember from the past that is to me is very relevant right now is that in the short term price allocates supply, it doesn’t create supply.
[David] Say that again.
[Bill] Price allocates supply, whoever’s willing to pay the most gets. What’s available right. In the short term, because, oil is a good example. Higher oil prices over time definitely lead to more supply but not in the short term. Measured in, months and probably single digit years. There’s a lot of focus on gas and gasoline prices and that’s important, but there’s a lot of other things going on with the Persian Gulf. Straight up hor moves being blocked right now. people don’t pay attention to, there’s a lot of refined product that comes out of the Gulf. So when we talk about the US being generally self-sufficient. In oil. That’s generally true, but there are a couple of big buts in there, and then the rest of the world has, it’s even worse right This one article I was reading talks a lot about, okay, diesel fuel prices are up dramatically and that factors through so many commercial business activities, right? Jet fuel they’re talking about in the UK that the last tanker full of jet fuel is on its way to the uk. And when they get that, and I don’t remember what it is let’s say it’s read an article on that, right? Say it’s a three week supply just to pick a number. What’s gonna happen at Heathrow Airport when they run out of that shipment, right? They don’t know where the next one’s gonna come from. And is that a go out and offer any price? And even if you do, where are you gonna get it from? And then you get into a lot of other goods. Helium is talked about, sulfur is talked about for fertilizer, that again, are coming out of the gulf or supposed to, but they’re not right now. And it’s pretty eyeopening how the impact is way bigger than just oil slash gasoline. The other thing that is out there is, so California gets a lot of its refined and products from Asia because, the refineries on the west coast have been shut down and Oh, by the way, yeah, there’s no pipeline from Texas to California. And if they’re already rationing in Asia, what makes you think if you’re at the end of that supply chain, that you’re gonna continue to get your normal supplies uninterrupted? So lots of broader things to think about. And this will, be the, the drum roll. So what if this persists for a while, What if this starts to lead to shortages, which start having impacts on a lot of industrial uses and it starts to radically slow down economic activity, right? You could see a significant drop in short term interest rates to try and do anything to juice economies that are, have parts of ’em are shut down. They can’t get key inputs. But then in the same time, you’ve got significant inflation risk. And again, this is not a prediction, right? So Alex you can’t write this one down with a date next to it. But what if there’s a scenario where two year treasuries are moving towards 3%, but 10 year treasuries are moving toward 5%. Interesting.
[David] You’re talking about the steepening of the yield curve.
[Bill] Exactly. But I’m talking about it’s steepening on both sides. Because you can get steepening.
[David] Explain what you mean. Paint us a picture on that. What do you mean by that?
[Bill] Okay so first steepening of the yield curve is just the spread between the, typically it’s the two year and the 10 year treasury. And that spread right now is around 50 basis points. Couple of months ago, before everything started, it was probably in the 70 basis point range. Short term interest rates have moved up as have long-term rates, but short-term rates moved up even more so the spread got less. So when I’m talking about the steepening of the yield curve, is the spread between those two increasing but specifically, ‘ cause you can get that happening with, let’s say the two year treasury is moving lower and the 10 year is not moving. That’s what we saw two, three months ago. What I’m throwing out is a consideration is movement on both ends. Because if you have oil supply issues that starts to crush economic activity, demand recession, the Fed and other central banks have to lower rates to try and do anything they can to stimulate economic activity. But at the same time, what oil is moving in the market is priced higher, and that’s if it starts to roll through other prices, then inflation becomes a problem. So even if the Fed is lowering the bond market which is what really controls long-term treasuries is saying whoa. Time out. We’re starting to look back to our, friends from the 1970s and going inflation. And if a trader’s gonna buy long-term treasuries, you’re gonna be like, yeah, no, I need to get compensated for that and i’m gonna pay less for it. So the yield starts to go higher, right?
[David] Alice, your thoughts as you listen to Bill. We’re not writing anything down.
[Alice] I promise you, bill, I won’t hold you to that, but it’s an interesting thought process and an interesting prediction. So it’s not all out prediction, but just an interesting idea on the combination of factors that right now we don’t interest interesting speculation, which is going Yeah. A lot of, yeah. So honestly I am in a wait and see mode. We’ve got things unfolding by the minute right now, even as we record this show. Yes. I’m gonna leave it to the experts like Bill and Les and Matt. Yeah. Yeah. Just keep listening.
[David] Mr. Kittle, your thoughts Good that we recovered a pilot that, it creates more optimism. I think there’s some reason for optimism when you look at the war that we’re executing. In spite of the propaganda we get out of this, I think there’s a hope that we’re gonna see an end to this sooner than later. I think once we do, I think we’re gonna see some things. The question in my mind is what does the end look like? If Trump is putting it on our partners, our nato quote unquote partners who don’t feel like much like partners these days that they’re gonna have to take on and keep the straights open. We’re interested in our interests are no nukes, and protecting our interests. So your thoughts, your observer of,
[Kittle] So you take exactly what Bill laid out there. And so there, was no other side to what he said. Should that begin to unfold to the point of you only have so much jet fuel left for the United Kingdom and that area of the world they won’t allow that to happen because of the Strait of Horus. That would bring all the ones, all the nations that say they don’t wanna participate in this into the fray, and they would open that up and they’re just gonna have to go in and take it over. Trump won’t let that happen long term. I don’t see us, based off what Bill said, if that’s what we’re talking about, I don’t see that being allowed to take place and stay in place long term. They won’t do it. Can’t shut down the world’s air traffic ‘ That’s basically what you’re talking about. That’s more of an, economic disaster if you don’t have any airlines. Look what happens when they shut it down for a couple of days here for TSA or slow it up. It’s, it is horrible. You start talking about worldwide because of one little shipping lane over there, which basically they have manipulated that oil in that shipping lane in the straight of horror movies for 47 years. So it’s time to get rid of that. And I just, that’s my personal opinion, not making any prediction. Don’t write it down Alice. If Bill’s right, I’m saying they will act quickly to stop the world. Last time we had an oil issue was the oil embargo. Yeah. We didn’t have the relationships we have today with, and every place else in the oil producing like we do. So it’s a different scenario today than it was 50 years ago in the seventies. Yeah.
[David] Yeah. Were you alive back then?
[Bill] Yeah. And the other thing with, now you’ve got the Gulf States are in a very different position, more aligned obviously with the US and the rest of the world in terms of if the stuff can’t get out of the Persian Gulf, they don’t get. And the other thing, and I don’t have the exact numbers, but I think they’re pretty close. So in the seventies, let’s say, and as oil started to be used as a weapon, Saudi Arabia could handle price wars because their cost of getting oil out of the ground was $12 hour, let’s say. The problem is, as their society has grown, and it’s all been financed with oil money their cost of getting oil out of the ground really hasn’t changed very much. But the amount of money that the Saudi government spends to maintain the country’s lifestyle means that they have to sell. 80, $90 a barrel for oil just basically to, fund their bribery campaign, right? That’s what their society is just a large scale bribery shell game. And, we look at it and we can’t get the oil X isn’t gonna happen, but if they’re not getting paid for it and they can’t continue the lifestyle of folks in their country their interests and ours are a lot more aligned than they were in when you talk about writing the embargoes in the seventies. And so the whole fascinating dynamics that are completely turned around from yeah. 40, 50 years now,
[Kittle] The chessboard is different today, okay? There’s not a country over there that doesn’t want, see the Iranian regime go away, gone. They all get rid of. At this point before you had all it is just totally changed. I just don’t see anything like your original scenario. If it happens staying in place very long at all matter of days or week or something like that, they wouldn’t do it if they don’t open that up. They’ve got too many tankers sitting over there trying, what is it they usually send 95 a day through. They’re sending two or three. Yeah.
[David] Two or three. Yeah. No it’s gonna be start felt getting felt real soon. Yeah. Real soon. Mark, any thoughts before we move on into Alice’s area?
[Marc] I got tons of thoughts. First of all I wrote a lengthy brief on the way I feel about it and posted it in my Facebook account and I’m in the process of posting it to my LinkedIn account. It’s a little long for LinkedIn, so I gotta figure out a way to different load it different. I had never took my uniform off. So I still think at things from a military perspective, and I watched Vietnam and participated in it in a war we didn’t win and didn’t try to win. I saw that we could have won in Korea and we didn’t. I’ve seen us have. A disaster in Iraq. I’ve seen this have a disaster in Afghanistan. So as I look at all those things I’m seeing, at this time, I wish everybody would sit back and say, we got in this damn thing, so let’s win it. And we’re not gonna win it. Trying to accommodate and make sure everybody in the world’s happy, we’re gonna win it by crippling them and getting a new regime in. Now, one of the things they’ve done, which might help us, is they’re trying to recruit an army of a million volunteers. And if they recruit them and arm them, that might be to force that overthrows regime, which I think is very interesting. And they might be recruiting their own demise, but the bottom line is we gotta win what we’re doing and do it the right way. And it’s the first time that even though we don’t seem to have Great Britain and other people right now, they will be with us. We got pretty much the whole world with us, except China and Russia. We just need to do it and get it done because everything we’re doing is doing us more damage right now than it’s doing them economically in other ways. And we just need to get to the finish line. And there’s no way to do that, but to win. And we need to map that course and do it. And I’m pretty firm on that. And I hope the rest of the people in this country get that way. The people that are saying we need to pull out what we started, we can’t do that again. We’ve done that too many times. Can’t do it again.
[David] Alright, thanks Mark for your thoughts on that. We’ll get some more. I want to move on. I’m looking at the clock and we could talk about this topic for a long time. And good commentary. Bill. I am hoping some of those scenarios do not play out. Quite honestly. I’m looking at where we could be going. Mr. Kittle, I know you have to head out, so good to have you here for the time we had you friend.
[Kittle] Thank you Dave. See you.
[David] You bet bye bye.