THE WEEK IN REVIEW: Feb. 14 – 20
Deadly cold in Texas
The polar vortex that overwhelmed the power grid in Texas last week resulted in thedeaths of at least 47 people and millions without power. Most of the middle of the country was hit with extremely cold temperatures, but Texas bore the brunt. The vortex eventually loosened its grip and moved eastward, but just as the country’s middle began to thaw, the finger pointing started.
Texas isn’t well-equipped for severe cold weather; its usual plagues include hurricanes or tornadoes. In fairness, the guidance given to most Texans was that there would be rolling blackouts to counteract the higher energy demand. When wind production dropped from 42% to 8% and wind turbines froze, demand quickly shifted to coal and natural gas to provide the needed energy. Because Texas doesn’t typically get that cold, some of the natural gas distribution facilities froze and put more pressure on the grid until it finally was overwhelmed.
The economic impact has yet to materialize, but the initial shock came in the form of a spike in natural gas and oil prices. Cue the finger pointing: Some blamed the unreliability of renewable energy because there’s nothing to renew if the sun isn’t shining or the wind isn’t blowing. Others blamed the environmental impact of fossil fuels making the weather more extreme. The most logical faction placed the blame where it squarely belongs, on an aging, inefficient grid lacking the appropriate resources to make sure people get power when they need it.
Where’s the economic lesson in all this? It’s not about old energy vs. green energy; it’s about finding ways to replace what we currently have and making it smarter, cleaner and better — without destroying the economy. Relying on old or untested equipment is a recipe for disaster. We need smart infrastructure spending, which includes renewables and fossil fuels used intelligently to complement one another. I think that’s something on which most rational people would agree.
In the interim, natural gas and oil will remain elevated. As we emerge from the winter, gas prices will continue to trend upward. Texas has a large economy that will take a hit as a result of last week’s events. Incidentally, gas prices are back up nearly to pre-pandemic levels, averaging about 75 cents more per gallon since the lows we saw last April.
Stimulus waiting game
The trading week was short but eventful. Retail sales improved the economic outlook early in the week, while Bitcoin topped $50,000. Then the weekly new unemployment claimsshowed no improvement, and markets sold off.
We also had congressional hearings on the GameStop trading mess last week. As I watched the proceedings, I was amazed by how uninformed members of Congress seemed to be about the industries they are supposed to regulate.
Treasury Secretary Janet Yellen appeared to righten the ship on Friday by reinforcing that we will need a massive stimulus deal to get the economy back on track. I don’t know if I agree with that, but it seems like the stimulus story today has become what the vaccine story was last fall. Back then, the story was that everything would go back to normal once the vaccines arrived. Now everything is supposed to start up again with a big stimulus plan?
Speaking of vaccines, vaccinations are slowly gaining steam. More supply is coming online and will hit full stride just in time for spring. Given the availability of vaccines and people getting outdoors, can we get back to normal? I’m 50-50 on that one, given all the twists and turns we’ve seen during this pandemic. So far, we’ve seen 12 months of turmoil and disruption.
One last thing to think about: The 10-year U.S. Treasury is beginning to tick up (1.34%). Last year we were below 50 bps during the sell-off. If anything will knock markets for a loop, it will be higher interest rates (remember Q4 2018) and the 10-year is a good indicator. I will be concerned if it starts to creep up toward 2%.
Coming this Week
  • It’s hard to believe, but this week will close out the first two months of 2021. Consumer confidence will be released on Tuesday and consumer sentiment on Friday; both numbers have been battered of late, so any improvement will be welcomed.
  • Homes have been a bright spot throughout the pandemic. New home sales and pending home sales will be released on Wednesday and Thursday, respectively. These need to remain solid as markets struggle to reach higher levels.
  • The second reading of Q4 2020 GDP will be out on Thursday, and a major revision downward would be bad. After last week’s poor unemployment number, new claims will once again be in focus.
  • Several Federal Reserve officials will speak this week (but not Chair Jerome Powell). They might let some news slip.
Have a great week!
Tom Siomades
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