What you see here is that since the beginning of the year, oil prices have gone up, which ultimately will translate to, into a higher cost of doing business, right? Running your factory, keeping the lights on, keeping your home warm, getting from point a to point B, all of these things go up, which should ultimately get reflected in prices, which is what inflation is. And so that’s a very bad trend. Obviously, we had a lot of really good stuff happen through the course of last year, but it’s largely reversed itself. So it’s important to double click into this and figure out, well, who’s driving this? Is it just a random act or is it a systemic set of decisions? And it turns out it’s systemic.
So if you go to the next chart, what this shows you is what the US has been doing. So The United States has clearly created an incentive to flood the economy with oil, which the laws of supply and demand would say prices should go down. And by bringing prices further down, they would have further brought down inflation and they would have pulled forward these rate cuts that we had been expecting from the Fed. The problem is that the rest of the world actually said, no, hold on. And that’s what you can see on the next chart. So for every time we were trying to increase production, all of these other countries have been cutting production. And this is the change in the OPEC plus crude production targets of 2024. So what you see here is for every barrel of oil, the US would pump out of the ground, more than that one barrel of oil would get actually restricted by all of these countries on this list, which is just to show you that these countries have a very specific view about how they want that energy market as, and that’s just one market, but it’s an input, a key input into inflation and rates to work. So you’re saying that the OPEC has a price per barrel price target, and they’re able to manipulate production to maintain that price target. So while the US is trying to lower the price prepare, all these other countries are able to have a stronger influence and balance out for you to get. Yeah, when you make these cuts like this, prices will go up because OPEC plus is meaningfully bigger. The sum of all the parts of OPEC plus is meaningfully bigger than just the United States on its own. And so the United States may amp up a few hundred thousand barrels a day, but if OPEC cuts by a few million barrels a day, you see what you saw on that first chart, which is the price will go up, and that’s largely why prices have gone up. So I think why this happens is because when they see the United States trying to manage inflation and manage global rates, right, because US rates are not just for the United States, there are, they’re the trendsetter for everything else. I think that in part, there is a decision that this rate philosophy, the economic philosophy, the political philosophy, if they wanted to support that, what they would do is actually also keep prices where they were or increase production, but by reining in production, what you’re essentially doing is voting against that entire apparatus, right? So the OPEC and all of those countries. And those decisions are not made by an oil minister, let’s be honest. They’re made by the leaders of those countries whose decision then gets reflected by the minister of petroleum or oil in all of these countries is a vote against Biden and the United States government and the politicization potentially of the Fed. And then the last comment is just that when you look at the reverse repo rate, which is a fundamental measure of liquidity, what you also see is liquidity very quickly getting sucked out of the system, which is also generally a system health check that the Fed uses to make sure that the system is operating as required.
So in totality, what I see is that there is a structural disillusionment with the current administration. And where people can make decisions in their own best interests versus the collective interest of the United States and a broader framework that the US may represent are voting against it.
And so this is why the idea of a persistent inflation rate is a lot more credible than it was six months ago. And I think, sorry, just the last point, and I think it’s just what sack says, which means that we’re probably now unbalanced 50 between a hike and a cut. And I think if you don’t see this thing change in the next three months, you’re gonna see 75,25 for a hike, at least 25 basis points. And I do think David’s right. I don’t see how the sitting administration in any government, we’ll be able to withstand the onslaught of electoral displeasure if rates are four and a/2,5 and 6% going into November.