In today’s Exponential Investor

  • Gas prices rise like helium
  • Are higher oil prices still bullish for stocks?
  • A game-changing blockchain event

In the film Up, retiree Carl Fredricksen attaches a bunch of balloons to his home in order to fly away from his construction site battle (they’re trying to build on his house). It’s a memorable scene as his house floats upward through the city and away to more beautiful lands.

During lockdown, a friend of mine sent a balloon into space. That’s a thing you can do now.

It turns out that there’s just something fascinating about things soaring upwards.

This may explain why the whole world is going crazy over gas prices right now. It feels like everyone is losing their minds over the gas price rises.

In the UK we also have a fuel crisis, but that’s a different kind of crisis and also mostly over. It was just another fine example of how human nature works. If there’s a limited supply of something you need and you think it’s going to run out, it is entirely rational to go and get some before it actually does so.

The trick was played by the fuel companies and industry bodies who fed the press with scare stories, hoping to nudge the government into releasing extra tankers or giving extra visas for drivers.

They played on human rationality.

In the gas world, there’s a stack of things going on. Is Russia behind all this? A bit. Is this what you get for trying to go green? Not really.

UK gas prices have gone truly parabolic, rising 40% in a day or 60% in two days. Just look at this chart.

The knock-on effects are many.

Firstly, in the investment industry, some hedge funds will be going bankrupt right about now, due to massive, unpayable margin calls on their natural gas positions.

Next, see what impact the surge in gas prices has on other businesses.

Many companies won’t be able to operate profitably if gas prices stay this high. We saw the impact on the UK when a large ammonia plant had to shut down – we suddenly faced the prospect of food shortages because we wouldn’t get enough supply of CO2 any more (CO2 is a key gas that is used in preserving food for longer).

Well, a huge ammonia plant in Germany just started cutting production. And similar things will be happening across the UK and Europe, and globally.

All of this is inflationary, and pressure will come in two ways. Either businesses will try and pass on some increased costs to the consumer. Or, they will reduce production until gas prices calm down, leading to shortages and bottlenecks.

We are already seeing the latter occurring in China, to a large extent, where air conditioning can’t be put on lower than 26 degrees, you can’t use elevators below the third floor and factories and construction sites are being curtailed to save power.

The surge in gas prices will have an effect on other industries too. Higher fuel costs are bad for the precious metals mining sector, as fuel is a large part of their cost base. Higher fuel costs reduce the margins available to miners.

All the while, it is hampering growth and economic activity.

It is prompting fears of a return to the dreaded stagflation, where inflation roars but economic growth dwindles. In that scenario, prices rise faster than wages, leading to an overall reduction in living standards.

It’s a fear especially prevalent in the UK, according to Bloomberg.

Then again, there is now a sort of mania and fear in the price. Winter has been anticipated, possibly too much, and is priced in to some extent. The industry will be doing all it can to source supplies. Negotiations will be underway with Russia to give Nord Stream 2 a green light, for good or ill.

I guess I’m saying that the extreme panic is probably a sign that it’s near its peak for now. Everyone is saying “just wait until winter”, but the gas buyers are buying aggressively for exactly that reason, which is why the gas price is up today. It’s forward-looking. For gas prices to fall, winter needs to simply be not catastrophic.

And given it’s sunnier in October than it was all summer, perhaps that’s not such a long shot.

In other news…

Oil prices rising used to be a good thing for equity markets.

They suggested that reflation was underway, that economies were reopening and that things were looking up.

As a result, US and global markets broadly tracked it higher:

Source: Koyfin 
S&P 500 in blue, WTI oil price in grey

But, just in the last few weeks, you can see a rare divergence.

Markets have fallen, and the rising costs of fuel have actually been part of the bearish narrative, for the same reasons described above. They’re rising to levels which are starting to harm economic activity, and potentially lead to shortages, and higher costs for companies (implying lower margins).

So, higher oil prices might not be good for stocks any more.

Meanwhile, the Evergrande story rumbles on in China.

Specifically, other property companies are going bankrupt now too, showing that Evergrande was not the only reckless borrower.

At the same time, Chinese home sales have started falling off a metaphorical cliff. Shenzhen saw second-hand home sales fall 80% (year on year) to 1,765 units in September. This was also a 14% monthly decline, and the first-time sales had been below 2,000 units in 12 years (i.e. since the financial crisis of 2008).

And the bad news keeps coming for China, as a study has come out showing that the Chinese region of Hunan (where Wuhan is) was buying up PCR technology and tests frantically as early as mid-2019, suggesting that there had, even then, been widespread awareness of a fast-spreading coronavirus. The study aggressively challenges all Chinese misinformation about bats, wet food markets and December timelines.

Blockchain event

Finally, if you’re interested in crypto and the blockchain, something huge is underway. It’s a potentially massive catalyst, that sent crypto markets #tothemoon the last time it happened.

I’m no expert, but I’ll leave it to Sam Volkering to tell you more.

There’s a special broadcast coming your way next week, so keep a very close eye out for that one!

All the best,

Kit Winder
Editor, Exponential Investor