Hurry up and taper! So say the consensus of pundits now, morphing from months of fearing the Fed ending quantitative easing’s bond buying would crush stocks and the economy. Now they claim QE must end to tame soaring energy prices they now fear will crush global growth. Wrong and very wrong! QE cutbacks won’t calm surging commodities—and needn’t. Price pressures will ease as supply problems subside, sooner than most think. Here is why.
Last month, I showed you why fables of past “tantrums” made 2021’s QE taper fears false. QE never, ever stimulates. It flattens yield curves, saps banks’ loan profitability and discourages lending. Still, misunderstanding the Fed’s 2013 and the ECB’s late-2016 tapers had folks everywhere sweating QE’s demise.
So this time, Fed and ECB officials foreshadowed every hint of tapering’s timing. Hence, markets pre-priced QE’s end. They yawned through Fed Chair Jerome Powell’s widely hyped Jackson Hole speech. Stocks and Treasury yields remained flat, essentially, for weeks afterwards. In Europe, markets similarly shrugged off Christine Lagarde’s September 9 “non-taper” taper announcement. Eurozone stocks slid a whopping -0.4% the week after. Bonds barely budged. Some tantrum!
That “taper tantrum” narrative is gone now. It evaporated in recent weeks as European spiking energy prices spurred fears of a global power crunch sending inflation skyward. At their October 6 high, Dutch natural gas prices—the continent’s benchmark—were up six-fold year to date. Seeing this, many now fear America will soon import the problem—US spot natural gas prices have more than doubled in 2021, from $2.36 per million BTUs to a high of $6.37 on October 5. Oil is rising in sympathy, too.
Pundits, still seeing QE backwards, have flipped. Now they claim tapering isn’t a threat; it is a deflationary savior. They say less “stimulus” will quell the white-hot, energy-driven inflation allegedly threatening stocks. But QE didn’t drive those European energy price spikes. They surged on short-term supply-side factors.
Consider: Did QE stop the wind from turning Europe’s turbines? Or limit natural gas output after big post-lockdown demand surprised producers? Did it order Russia to throttle gas pipelines or cause Britain’s driver shortages, slowing fuel station deliveries? Or spawn Hurricane Ida, briefly stunting US oil and gas output? Did it lead China, a country with a closed financial system, to ban Australian coal imports and shift to natural gas instead? No, no, no, no, no and no! QE didn’t create these obstacles. Its removal won’t end them.
The good news: Price pressures will slow, QE or not. Europe’s winds will blow again—key, considering wind generated 15.8% of Europe’s electricity last year. They may be already. According to WindEurope, Europe’s turbines generated just 341 gigawatt hours at their September 4 low and averaged 693 daily in Q3. October is beating that handily thus far.
Higher prices will spur natural gas producers to boost output and exports—easy to do. Europe’s biggest supplier, Russia, already signals it will. Norway too. US oil and gas output is also resurging post-Ida. Production in America’s prolific Permian Basin could hit its record high of 4.9 million barrels per day this month, according to Rystad Energy.
Baker Hughes’ count of active rigs drilling for US oil and gas rose from 351 on January 1 to 533 on October 8. As for American natural gas prices, $6 isn’t exceptionally high by historic standards. Prices often hovered there pre-2010. Moreover, domestic consumption eats up 80% of US gas production. Another 10% is exported, with the rest left to fill currently below-average supply. America won’t see some European-style crunch.
There will be short-term headaches, of course. But supply will rise to meet demand as pre-pandemic norms return, lowering prices soon.
This already started with some more fully scalable industries like lumber. Soaring lumber futures stoked early 2021 fear of lasting high prices. But they are now -55% off May’s highs. Producers adjusted. Consumers, too. The S&P/Goldman Sachs non-energy commodity index surged 22% to May’s high. It has slipped -6% since as producers ramped up.
Even if supply trouble lingers, energy prices rising doesn’t create wicked inflation. From 2004 – 2008, US energy prices—including electricity, oil, gasoline, natural gas and other fuels—jumped an average of 11.6% per year. Yet the consumer price index (CPI) averaged 3.2%. Why?
Energy totaled below 10% of the CPI basket during that span. It was far smaller, 6.2%, last year. Why? Because rising prices in the early 2000s spurred innovation and vast American shale gas and oil fields production. Prices crumbled. Moreover, increasingly energy-efficient economies are ever less susceptible to energy crunches year by year.
Yet, don’t high energy costs raise prices downstream, with manufacturers passing costs on to consumers? Only if they have pricing power and the increases last—both doubtful. We just aren’t likely to see the supply-side driven, reopening-related fast inflation rates of this summer persist for long.
Even if I am wrong, a lasting bout of higher prices isn’t automatically bearish. Stocks can and have, performed fine amid relatively swift inflation. Taper terror’s morph into inflation dread is sneakily bullish. It is a statement about Halloweenish spooky sentiment. It is bullish. False fears always are. They keep sentiment low, teeing up positive surprise and higher stocks ahead.