Central Banks and Energy Policy Ignore Real-Time Data

In his 1711 treatise An Essay on Criticism, English poet Alexander Pope wrote, “To err is human; to forgive, divine.” In the same essay, Pope also wrote, “Fools rush in where angels fear to tread,” “A little learning is a dangerous thing,” and “Our judgments, like our watches, none go just alike, yet each believes his own.”

Criticism is the expression of disapproval of someone or something based on perceived faults or mistakes. Sixty-one years before Pope’s essay, in 1650, English politician Anthony Weldon said, “Fool me once, shame on you; Fool me twice, shame on me.”

The U.S. Federal Reserve and the U.S. administration’s energy policy have roiled markets across all asset classes. While central bankers and politicians believe they make rational decisions, markets driven by sentiment validate or invalidate those choices. Data-driven decisions can lead to irrational choices because data is historical, and markets operate in real-time. Fighting inflation and addressing climate change have led to policies that embody Pope and Weldon’s proverbs based on market reactions.

The pandemic- The Fed and Governments lit an inflationary fuse

• The Fed and worldwide central banks responded to the early 2020 global pandemic with a tidal wave of liquidity and accommodative monetary policy.
• The governments unleashed unprecedented stimulus programs, increasing debt levels.
• The pandemic claimed over 6.9 million lives, while liquidity and stimulus lit an inflationary fuse.

Climate Change- Inhibiting fossil fuel production too early

• Europe, the U.S. under the Biden administration, and other allied countries have established climate change initiatives that encourage alternative and renewable energy sources and inhibit fossil fuel production and consumption.
• China, India, Russia, and their allies, have not followed the green agenda.
• The world continues to rely on petroleum, natural gas, and coal for energy.

Fighting inflation with aggressive monetary policy

• After calling rising inflation a “transitory pandemic-inspired event” throughout most of 2021, the U.S. Fed and other central banks could not ignore increasing consumer and producer price data.
• Inflation rose to the highest level in four decades.
• The central banks waited too long to increase interest rates, resulting in chasing inflationary pressures with aggressive rate hikes and credit tightening.

Handing oil pricing power back to a cartel

• OPEC, the international oil cartel, has cooperated with Russia over the past years to provide oil producers with the highest possible price that balances global fundamentals.
• The shift in U.S. energy policy to inhibit fossil fuels strengthened OPEC+s’ control of oil prices.
• Russia is funding its war in Ukraine with oil revenues and is using petroleum and natural gas as economic weapons against “unfriendly” countries supporting Ukraine.

Mistakes- Markets may not be forgiving

• The U.S. central bank and government policies contributed to inflation and waited too long to address the economic condition.
• Energy policies that inhibit fossil fuel production and consumption ignore the ubiquitous demand for the traditional energy sources that power the world.
• Recent bank failures, the growing threat of inflation, and rising debt levels threaten a severe recession or worse.
• Governments and central banks could pay the price for reactive instead of proactive policies.
• Markets operate in real-time; data is historical.
• Mistakes could cause irrational volatility in markets across all asset classes- Be careful.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!