A lot of noise, very little change. This week, EcoMan23 is going to focus on the facts and data, helping you cut through all the empty words and interpretations that don’t help you make sense of what you’ve read and seen in recent days. Where is the American economy heading, where will oil and gas from the Persian Gulf reach (or not reach), and most importantly—what does this mean for us, the “little guy”?
Let’s start this week with the U.S. labor market. Or in short—is there work? This week, the updated jobs report for March was published, which, as always, also updates backward the report that preceded it (in this case—February). The media celebrated an unexpected addition to jobs in the U.S. Instead of an expected addition of 59,000 new jobs in March, the figure found was an addition of 178,000 jobs!
Well, forgive me. Let’s analyze what’s really happening here. First of all, the positive news (in the opinion of the media and economic analysts) stems from the gap between what the report found, and what they expected it to find. That is, if expectations among economists had been for an addition of 178,000 new jobs, the reaction to the report would have been—well okay, that’s what we expected, nothing good or exceptional happened. The lowering of expectations itself created the appearance of an excellent report, but it is not necessarily such.
Let’s dive a bit deeper. The report updates the February figures, which were anyway “not something,” to a decrease of 133,000 jobs. That is, even if you only finished third grade (and I know you finished many more grades...) one can understand that March and February together are already much more balanced than March alone. Labor data is something very difficult to analyze, so they are always updated retroactively, and next month they will again update the March figure.
But if something can be learned from the latest report, it is that not much really happened. Jobs were lost in February, returned in March (along with the return of the striking federal employees), so—great joy over roughly nothing. The report has many more figures, showing a slight decrease in the unemployment rate, the overall labor force participation rate, alternative unemployment measures, and many more analyses that will interest economists but not you (and good that it is so), and in this case—one cannot see the forest for the trees.
And therefore, on the bottom line—a relatively good jobs report after a relatively bad jobs report—and no drama. Ultimately, the most important thing to remember about this jobs report is that it interests mainly historians. The impact of the biggest economic event in recent times, the Israel-U.S.-Iran war, has not yet fully trickled into the labor market. Therefore, the April report, and especially the correction that will be made regarding the March data, will be much more interesting than this report.
And since we are already talking about the war again, then come on—let’s explain the last week with a simple economic eye.
The first thing you must have noticed is that gas went up. The second thing you noticed is that it went up and stopped. That is—the price jumped (a lot), and in the last two weeks, it remained at the new level. This fits very well with oil prices in the world market, which have stabilized at levels slightly above $100 per barrel. What is happening here? If the war continues, and the attacks intensify, shouldn’t there be less oil, which costs more and more?
So here’s how it is. The phenomenon that is beginning to occur, courtesy of market forces stronger than any army, is finding alternatives. Fans of world politics (or alternatively, citizens of the relevant countries) know the phenomenon from Europe, after the start of the Russia-Ukraine war. Europe relied heavily on energy piped through two giant pipelines from Russia to it and enjoyed cheap gas prices and available supply for years.
After the start of the war, both sides used the gas supply as political leverage over each other (Russia threatened to stop the supply, Europe threatened to stop the purchase), and energy prices jumped dramatically. Sounds familiar, right?
The Europeans felt this that year in their pockets, which financed home heating costs (folks, Europe can get really cold during winter time). Their electricity bills jumped high. Very high. Sometimes threefold or more. That is, much more than what is happening to you at the gas station today. Of course, the matter caused a great public uproar, governments subsidized (that is, participated) in a large part of the costs, and a new need was created: to solve the European energy problem.
And need, as you know, is the mother of invention.
A few years later, the European continent is much less dependent on the energy supply from Russia. Without getting into the dry details, the geo-political and economic result of the Russian use of the energy threat is the “liberation” of Europe from dependency on Russia, a decrease back of energy prices (heating, industry, fuel) for the private and industrial sector, and a significant weakening of Russia’s power in the international economic arena, especially vis-a-vis its neighbors.
Now, a bit south to the Persian Gulf region. To me personally, the dangerous game in restricting passage in the Strait of Hormuz reminds me exactly of this precedent. And judging by the halt in rises of global oil prices, it seems that here too, the economic need will beat the tough tactics of the Iranians. Evidence is beginning to accumulate on oil “bypasses,” exactly as the human body learns to bypass a damaged artery using an existing system of other arteries and veins, which undergoes “training” to support a greater blood output through it to support the body and replace the damaged artery, so too the Gulf states are training existing “traffic arteries,” which until today led low-capacity oil and gas, for higher output.
That is to say, if 20% of the global oil and gas output, which was supposed to pass through the Strait of Hormuz, was blocked about three weeks ago, as of today part of it (not all, and not everywhere) is beginning to leak out through the alternative arteries. Oman has trained an eastern port to the strait, which bypasses Iranian control. Saudi Arabia uses southern bypass traffic from the Yanbu port, through the Suez Canal, to export its oil to the West, and in addition, truck traffic (guys, trucks. Easy.) is flowing oil from Iraq to Syria and from there, across the Mediterranean, the border is only the endless horizon.
As long as the Iranians continue to hold the Strait of Hormuz card, they will find over time that the card is fading and losing importance. The Gulf states, and especially the big money, will carve the routes bypassing the Strait of Hormuz, and leave them with a giant asset that has fallen from greatness. In this case, oil prices will change direction and start to decrease slowly, as the world gains confidence in the alternative traffic arteries, and this strategy may flip—the strait will serve mainly the Iranians, and their oil supply eastward, to Asia—mainly to China—and we may yet find ourselves in a new geo-political reality, where this time it is specifically the U.S. that will block the strait against the Iranians, as an economic chokehold movement to the only source of income left to it.
Fantasies? Maybe, but don’t forget that economy and money win in the end.
What is happening with our money?
We talked in previous reviews about gold, and its surprising behavior in a downward direction, specifically in difficult times of uncertainty. We brought reasons for this decrease likely being temporary, and stemming from a number of specific factors (each of which can have an influence, and certainly a combination of some of them or all of them). Well, this week too, it seems gold is maintaining strength and price returning to crawl its way up to prices of over $5,000 per ounce. If the factors holding gold (inflation, government debts, geo-political uncertainty) remain to accompany us, gold will also continue to trade at high prices. An investment portfolio leaning on dollar value, without gold, is an acrobat on a rope without a safety net beneath him.
Stock markets exhibited stability this week, with moderate gains in the leading indices. This is very good news for investors, who are getting a message from the big money—with this situation we can live, at least for now. As I wrote in previous reviews, a solution of the situation in the Gulf—any solution, what does its reason and its long-term result matter—will cause continued stability in the markets and a return to the path of rises. The technological transformations that are changing the world at these moments will add huge value to companies trading on the market and the world economy.
The continuation of the state of war, with mutual threats and trade wars, may cause the renewal of declines in the capital market. It will harm both stockholders and bond holders. It will prevent the Central Bank from lowering the interest rate and continue to weigh down on your interest expenses (loans, mortgage, just overdraft in the current account). The main problem with such a scenario is not its prolongation, but the recovery time it will take the economy after it ends.
The type of solution that will be will not affect the direction of the markets in the short term but will definitely affect the long term. Regime change in Iran and an agreed solution regarding the Strait of Hormuz will have a very positive effect, and a “just” cease-fire where each side declares itself the winner will leave an element of a Trojan horse in the markets—we will not know if and when it will return to harm us from within—but, as the great economist John Maynard Keynes wrote, in the long term everyone is dead, so we will continue to focus on the short term, and what to do here and now.
With head forward—all sides in the Gulf have a lot to lose from the continuation of fighting, and very little to gain, and therefore logic says that this war is close to an end. Therefore, according to simple economic analysis, take a bit more air to the lungs, hold onto your assets, check that there is also gold in the portfolio, and for the brave among you—if the stocks you love have dropped strongly enough—maybe this is your time to buy.
See you in next week’s letter, or during the week—if I can’t restrain myself until then...