Growing demand for fossil fuels from economies that care little for appeasing climate advocates will offset current green policies says ValueTrend’s Keith Richards.
“Created in America but Parts from China” has been the status quo for many products bought and sold in North America and Europe in recent years. This trend will be changing. US President Joe Biden recently signed an executive order to boost federal agencies’ purchases of US products, fulfilling a campaign pledge to lay out a “buy American” plan. Biden’s order also directs a federal panel to finalize changes within six months that would tighten standards defining American-made products to ensure they are manufactured with a higher percentage of US components and labor.
Here’s the problem: US labor vs. Chinese labor cost is estimated as 5x more expensive. Moreover, Biden is advocating a higher minimum wage and union power. Biden is guaranteeing meaningful inflation is coming. It won’t hit us right away. But it’s coming.
Immunity will release spending spree
The COVID vaccination program, combined with the naturally acquired immunity of people previously infected with the virus, will get the US close to herd immunity by the summer or fall of this year. This, along with rampant money printing, low interest rates and a pent-up demand for goods as the economy reopens almost guarantees that inflation will rear its head again in the coming 1-2 years. For this reason, I’ve been harping on holding some commodity exposure in one’s portfolio. Commodities are the ultimate reflation trade. Lately, I’ve paid particular attention to the oil trade. Here’s why:
Question: What happens when people feel safe enough to go back outside?
Answer: They drive more! Traders are beginning to realize this potential—and gasoline is rising in price.
But what about the green movement? Aren’t we soon to be driving around in EVs, using solar or wind power to heat our homes, drinking from ‘water-boxes’ and wearing hemp clothing? Market players who bid oil prices down this fall failed to realize that seismic changes in energy consumption and fossil-fuel-derived products would not change overnight. Add in the fact that Saudi Arabia, along with other major oil producers, have cut production in the face of demand slowdowns. Traders have not fully considered the impact of a reopening of the economy.
Demand for fossil fuels will ramp up
Unless we all end up converting our heating and transportation needs to solar and EVs in the next year or two, we will likely ramp demand for fossil fuels up in an exponential pattern from where it is right now. Further, usage of fossil fuels in China and India (the fastest growing economies in the world), amongst other developing nations, is growing. Allow me to quote Larry McDonald of The Bear Traps Report. Larry is a renowned opportunistic trader who made his name as one of the top-rated distressed debt traders in the world. This man knows how to spot a contrarian trade:
“… altruism doesn’t work and future threats of disaster don’t work. Only a clear and present catastrophe works. Now, the 25 people of China’s Politburo control the lives of the 1.44 billion China citizenry. What do these 25 people care about? Ethics? Selfless sacrifice for the greater good of the planet? Noble disregard of personal interest for the benefit of all humanity? Uh. No. They care about one thing and one thing only: power. Therefore they fear one thing and one thing only: loss of power.”
It’s time to buy oil production stocks
To solve global warming, taxes and rules have to be put in place to make it more expensive to emit carbon. That in turn makes fossil fuel use more expensive. That in turn means Chinese consumers will have less money to spend. That in turn means their standard of living goes down. That in turn increases the odds of an overthrow of the Politburo. We are largely immune from being aware of China’s internal dissent, but there are multiple riots every single day in China against local corruption. Revolutionary fervor is hardly absent from the Hunan hinterlands that produced a Mao. And the Politburo knows it.
So, the calculation is straightforward: once environmental catastrophe is of more concern to the people than living standards, once environmental catastrophe directly lowers China’s living standards, then, and only then, will China join the US in putting a price on carbon by taxing it and implement rules restricting its emission. Otherwise, not happening. Ever. And if China won’t, India won’t either. Their view is that the West grew and polluted, so its only fair the East grows and pollutes.
In other words, growing demand for fossil fuels out of economies that care little for appeasing climate advocates will likely offset current green policies. This, while production has been CUT!!!!
Simple equation here, folks:
Same or rising demand + falling supply = RISING PRICES!
In my mind, the energy trade represents one of those opportunities that is overlooked by the crowd. This is a position that can both act as a potential inflation hedge AND represent a logical contrarian trade to those who follow the logic above. For this reason, ValueTrend has taken a position in oil producer stocks for the first time in many years. We do not know what these positions will do over the next few months. But we are strong believers that the potential for a significant profit over the coming 1-2 years is real. If you buy into that argument, perhaps it’s time for you to consider adding a bit of energy to your portfolio.
Keith Richards is Chief Portfolio Manager & President of ValueTrend Wealth Mgmt. He can be contacted at firstname.lastname@example.org. He may hold positions in the securities mentioned. The information provided is general in nature and does not represent investment advice. It is subject to change without notice and is based on the perspectives and opinions of the writer only. It may also contain projections or other “forward-looking statements”. There is significant risk that forward looking statements will not prove to be accurate and actual results, performance, or achievements could differ materially from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please consult an appropriate professional regarding your particular circumstances.
This is an edited version of an article that was originally published for subscribers in the February 2021/First Report of The MoneyLetter . You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter. 
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