July at Lykeion

We closed July with an enhanced feeling of appreciation for the best of what life has to offer: friendship.

From the work colleague you finally connect with after your third Moscow Mule at your company’s summer party to the friend that pre-dates your own ability to correctly spell your last name, finding ways to spend quality time with friends rarely disappoints.

This is a key belief of mine, despite the recurrent complaints I received this past weekend from my annoyed Portuguese friends that went, broadly, as follows: “Dude, you know that a Burning Man camp fundraiser beach party at 2am is not the best place to try to engage people in inflation or corporate margins debates, don’t you?”.

I wonder if Tim gets the same heated feedback when he tries to push Nuclear Energy reforms during surf camp sunset parties in Santa Teresa?

Must Read: Nat Gas, LNG, and the Need for Alternatives to Russian Pipelines

Jacob’s report this month helped us learn a lot more about the history and set up of the Nat Gas and LNG markets. This was extremely interesting given how important Nat Gas is in the context of the Russia-Ukraine war, Europe’s energy dependence, and the risk that the US might ban exports of LNG if Nat Gas production in the Marcellus or Haynesville fields drops in the next couple of years – as the guys at GoRozen believe it will.

Charts of the Month

My favourite one this month was Tim’s analysis of how the US responded to the Saudi-led oil embargo that prevented OPEC oil from being exported to the US (which led oil prices to increase by almost 4x):

“The response to this [oil embargo], you could say, in a terrible dad joke kind of way, was to go nuclear.

From 1970 to 1990, the U.S. built the vast majority (96%) of its fleet of nuclear reactors that are operating today.

Additionally, the Strategic Petroleum Reserve was created, to soften any such supply choke-offs in the future. It was a dual approach – reduce the amount of oil you need to produce energy and create a strategic reserve so that this type of thing, which could be a death blow to a country if not prepared, never happens again.

I don’t want to complain about the SPR or lack of nuclear investment right now, so I’ll just state the facts: the SPR is now down to an almost 40-year low (with another 20 million barrel sale announced today) and we basically gave up on the most geopolitically sound, economically robust, and environmentally friendly fuel source on the planet, 30 years ago.”

Markets in 2H: Earnings Downgrades and Margin Compression

The first half of the year was mainly about multiples compression, whilst the second half will likely be about earnings downgrades / margin compression. There’s a ton of downside risk, in my opinion, in equity markets still, but seeing the NASDAQ rally +10% over the last two weeks implies that the market is gradually beginning to believe that the Fed will need to pivot sooner rather than later.

I think the more markets try to anticipate the pivot (with rallies like the ones we’ve seen), the more room the Fed will have to continue tightening, which implies further room for downside risk (Roger will write more on this over the next week, so stay tuned). We’re in for a volatile 2H.

We had three guest contributors (Nick Glinsman, Jack Farley, and Seth Levine) contribute to this month’s ‘Why Does This Chart Matter?’, where they gave their views on the implications of the Financial Conditions vs Inflation Chart below. Financial conditions matter a lot, and a high (or increasing) number should make you more worried, whilst a low (or decreasing) one should make you more relaxed. How much tighter will Financial Conditions get?

Ah… and remember, this is barstool chat, not financial advice…

As always, we'll see you out there.