wheat vs. chaff (vi)

I was intending to post this yesterday but ended up getting sidetracked.

All bear markets have some features in common, the most obvious one being that stocks in general go down. There are also broad differentiating factors: plain vanilla down markets result from the monetary authority raising rates to cool down an overheating economy; other, more serious ones come from external shocks. Examples of the latter would be the 10x rise in oil prices during the 1970s, the covid pandemic or the Russian invasion of Ukraine.

In addition to the very broad factors, both bull and bear markets tend to have currents of out-and underperforming stocks that are also driven, in a positive or negative direction, by technological change or other secular influences.

The most straightforward of these last in the current market, I think, involve the reaction of the world to the invasion of Ukraine. As I see it,

–the invasion itself has disrupted the world market for food grains, iron and steel, assembly of durables like autos and contract coding

–the resulting boycott of Russian exports has intensified those three. By far Russia’s most valuable export, however, is hydrocarbons–by value, natural gas is the clear #1, with oil (Russia produces about 10% of the world’s output) a distant second

–the experience of the past fifty years is that oil boycotts are never completely successful. Output (usually a lot of it) is relabeled as of different origin and sold anyway. The demand for oil, however, is highly inelastic, meaning even small changes in output can lead to large change in price. So, perversely, the move to limit unit volume exports could end up increasing total income to Russia. It seems to me that the real NATO strategy is to deny Russia access to international oilfield service companies’ development expertise, thereby reducing potential output dramatically over several years

–natural gas is another matter. At the surface it’s just that, a gas. So it is either delivered to the user by pipeline or liquified and shipped in cyrogenic containers (very expensive). From Russia’s perspective, finding new buyers and delivering output won’t be easy. For the EU, locating alternate sources and building necessary infrastructure will likely take years. To me, this suggests that conservation and developing non-hydrocarbon alternatives will be the EU’s answer

–as far as agricultural commodities are concerned, shortages seem to me to be a function of the time it takes from planting to harvesting, a question of months, not years

Overall, assuming the invasion doesn’t end suddenly, I think a high oil price will accelerate the move to electric cars, the main beneficiaries being automakers without assembly operation in Russia or Ukraine.

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