Over the Labor Day weekend, The Wall Street Journal (in “Federal Oil Leases Slowed to a Trickle Under Biden,” September 3-4, 2022) reported that no other president since Richard Nixon in 1969 and 1970 had leased out fewer than 4.4 million acres during the first 19 months of his first term. However, President Biden’s Interior Department has leased out only 126,228 acres (less than 200 square miles) for drilling through August 20th of 2022 (his first 19 months in office). In doing so, he is fulfilling his campaign promise to stop drilling on federal lands, due to his commitment to transitioning to cleaner energy.
Specifically, candidate Biden frequently made a firm promise of “No more drilling on federal lands, no more drilling, including offshore… no ability for the oil industry to continue to drill… period.”
The Journal article quoted David Bernhardt, an energy lawyer and former Interior Secretary in the Trump administration, who said, “The president said he was going to stop leasing, and he’s been remarkably successful.” Obviously, the mid-term elections will sort out whether most voters agree with this policy.
Interestingly, OPEC+ last week agreed to reduce its crude oil production by 100,000 barrels a day due to fears that demand will drop due to seasonal pressure, as well as weak economic growth overseas. Both crude oil and natural gas prices remain artificially high due to external forces, such as (1) Putin’s bad behavior, (2) Europe imposing special energy taxes that squelch innovation, and (3) President Biden going on the warpath against fossil fuels (and his predecessor). Fortunately, energy stocks are poised to report strong earnings for the second half of 2022, while the S&P 500 is forecasted to post earnings declines.
At the same time, Biden’s intentions for a rapid transition to alternative energy sources are backfiring. I ordered a couple of EVs, but their production and delivery dates keep changing almost weekly as the company apologizes on its website for supply chain woes as well as shipping glitches. Clearly, there are acute supplier problems, complicated by an acute drought, shipping woes and sky-high electricity prices.
The latest heat wave threw California into a seasonal sauna. My family has a home in Solano Beach in North San Diego County that does not have air conditioning, since it sits atop a hill that gets cooled by coastal fog on most mornings, but during the recent heat wave, state warnings of rolling blackouts caused my family to flee. The State of California has issued warnings to set thermostats to 78 and not charge electric vehicles (EVs) in order to protect the power grid, which does not generate much hope for the grid.
Obviously, we can profit from the transformation to a green economy, which is why Enphase Energy (ENPH) has been a big winner in our portfolios. However, the ESG investing fad flamed out last year after the Lucid (LCID) and Rivian (RIVN) IPOs, which turned out to be mostly “pump and dumps” by Silicon Valley venture capitalists using the IPO as an opportunity to exit. A year ago, Lucid and Rivian were ESG “darlings,” and after their IPOs, they were briefly worth more than GM and Ford (F), respectively, in the hopes that they might become the next Tesla (TSLA). Now, both Lucid and Rivian need more capital injections, since they cannot obtain the batteries that they need to scale up to their EV production, so both are still losing money.
The net result is that the green revolution is still a luxury for rich people who can afford an expensive EV, or solar panels and powerwalls to reduce their dependence on electricity grids. The green revolution will continue, but with barely 3% of U.S. electricity production originating from solar and wind sources, fossil fuels will still dominate energy production for the rest of my lifetime. The truth of the matter is that unless each and every homeowner decides to spend $100,000 or more to go off the electricity grid with an integrated Enphase Energy system, the green revolution will not be happening with the rapidity that President Biden’s team wants. Ironically, there were not many serious incentives in Congress’ green energy bill other than to raise taxes on coal, crude oil, natural gas and methane emissions.
One of the exciting developments last week was that Britain’s new Prime Minister Liz Truss proposed slashing taxes and providing relief to citizens facing record-high electricity bills. Essentially, Prime Minister Truss is trying to shock the British economy back to life, so that the velocity of money picks up and prosperity rises. The real problem Britain has is that electricity prices are so high that many citizens do not have any money left over to spend on discretionary items. Furthermore, with the British pound at a 37-year low to the U.S. dollar, everything Britain imports is now more expensive, so inflation is running much hotter there than in the U.S., which is why the Bank of England keeps raising its key interest rates.
I wish Liz Truss well. If she can get the British economy moving, she could go down in history as Britain’s greatest Prime Minister since Margaret Thatcher, who is Truss’ political hero. Since Britain is supplying military aid to Ukraine, Prime Minister Truss’ rhetoric against Vladimir Putin is very assertive. I should add that since Britain was less dependent on Russia energy, Prime Minister Truss can be more assertive against Russia and may become the face of European opposition again Russian aggression. One good thing that Prime Minister Truss announced on Thursday is that she wants to license new North Sea oil and gas projects as well as end fracking bans to try to make Britain more energy-independent.
The other interesting news in Europe is that EU energy ministers are now debating capping energy prices to squelch soaring electricity prices. Germany has already imposed windfall profit taxes on electricity prices. France is normally an electricity exporter due to its vast network of nuclear plants, but low water levels on rivers from the summer drought forced France to import electricity. A French official said that it might be better to have different caps on electricity depending on the technology used to generate power, saying, “The value generated by a French nuclear plant isn’t the same as the value created by a German lignite plant or a Spanish wind turbine.” In other words, it may soon be every country for itself, and caps may not work out. In the meantime, all this talk about price caps helps boost fossil fuel prices near term.
The U.S. Economic News is Finally Beginning to Pick Up Again
The economic news last week was encouraging. The Institute of Supply Management (ISM) on Tuesday announced that its non-manufacturing (service) index rose to 56.9 in August, up from 55.1 in July. The various components were encouraging, such as business activity rising to 60.9 (from 59.9 in August) and new orders reaching 61.8 (from 59.9 in August), as 14 of the 16 industries reported expanding in August.
On Wednesday, the Commerce Department announced that the U.S. trade deficit declined a whopping 12.6% in July as exports rose 0.2% to $259.29 billion and imports declined 2.9% to $329.94 billion. Although declining imports could be a sign of waning consumer demand, the fact that the trade deficit has shrunk for the past four months is contributing to a stronger U.S. dollar as well as to better GDP growth.
I should add that the Atlanta Fed’s GDPNow model is estimating 1.3% annual GDP growth in the third quarter, down from its previous estimate of 1.4% growth. The Atlanta Fed is now about in the middle range of most economists’ private estimates, which range between 0.5% and 2.6% annual GDP growth.
Also on Wednesday, the Labor Department announced that jobless claims in the latest week declined to 222,000 vs. a revised 228,000 in the previous week. Continuing jobless claims declined to 1.415 million, down from 1.438 million in the previous week. New claims for unemployment are now running at a 3-month low, and the 4-week moving average has declined to 233,000. So the job market is improving.
The Fed’s Beige Book survey was released on Wednesday in preparation for the September 21 Federal Open Market Committee (OTCPK:FOMC) meeting. It was essentially a buzzkill. Specifically, the Beige Book survey uses “Fedspeak” to cloud the picture. Although it acknowledges that inflation is beginning to fade, inflation “remained elevated.” The Beige Book survey also said that, “Overall labor market conditions remained tight,” adding that supply chain disruptions “continued to hamper production.” Overall, the Beige Book survey said that the outlook for the U.S. economy over the next year “remained generally weak,” so I expect this language will push the Fed to make one last large rate hike on September 21st.
Also, the European Central Bank (ECB) is beginning to complete with the dollar on the interest rate front. Last Thursday, the ECB raised its key interest rate from 0% to 0.75% in a desperate attempt to fight inflation. Since 2012, the ECB has set its key rates at -0.5% to zero, so the era of negative to flat interest rates is finally over. The ECB also pioneered Modern Monetary Theory (MMT), which is unlimited money printing, which is also now over. Looking forward, the ECB said it expected to raise key interest rates further and their future key rate decisions would be “data-dependent,” which is considered dovish language in the U.S., but in Europe these words are causing more uncertainty, since inflation is running much hotter due to energy shortages. The euro briefly rose above parity to the U.S. dollar after the ECB rate hike, so it appears that a currency war may be brewing, since the weak euro is a big inflation catalyst.
In business news, Apple (AAPL) announced the iPhone 14 on Wednesday, and that helped boost the entire tech sector, with NASDAQ rising over 4% last week. Obviously, many people spend more time on their phones than with their spouses or family, so I expect that many iPhone users will upgrade to the iPhone 14. Also, Apple is diversifying its manufacturing base from China to India (for iPhone) and Vietnam (for iWatch and Mac computers), so I will be very curious to see how fast iPhone 14 delivery will take.
Navellier & Associates owns Enphase Energy, Inc. (ENPH), Apple Computer (AAPL), Ford Motors (F), and in a few accounts, Tesla (TSLA), per client request in managed accounts. We do not own General Motors (GM), Lucid Group (LCID) or Rivian Automotive (RIVN). Louis Navellier and his family own Apple Computer (AAPL) and Enphase Energy, Inc. (ENPH), in a personal account and Enphase Energy, Inc. (ENPH), Apple Computer (AAPL), Ford Motors (F), via a Navellier managed account. He does not own Tesla (TSLA), General Motors (GM), Lucid Group (LCID), or Rivian Automotive (RIVN) personally.
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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