Empty Tanks and Empty Desks

What Happened?

This week we saw volatility in the markets due to both the conflict in Iran and employment data. The two catalysts are making the Fed's job even more difficult. With WTI crude prices hitting $90/barrel it would be understandable to be concerned about inflation. However, on Friday important jobs data was released showing the United States actually LOST 92,000 jobs in February, compared to estimates of gaining 60,000. This is a miss by -152,000 jobs.

Why It Matters

You will see gas prices skyrocket. As for the jobs data, it was so bad that in the past it has only been seen during recessionary times. Now, the Fed is concerned about "stagflation" which is the rare times where an economy sees slow growth, high unemployment, and high inflation.

Let's Dig Deeper

We're going to cover three topics in more depth:

1. Oil and Gas Prices
2. The State of the Labor Market
3. The Fed and Fears of "Stagflation"

Oil and the Straights of Hormuz

When "Operation Epic Fury" was launched last week, most economists assumed that oil prices would rise. Why? Because of a little waterway called the Straights of Hormuz, or "SOH" for short. The SOH is only 21 miles wide and it is the entrance from the Gulf of Oman into the Persian Gulf. This is a strategic point for the US military as well, with most middle eastern naval deployments maintaining a strike group there. Here at Pioneer Financial, we've been to this location many times. It's always a tense transit, even during "peaceful" times. With the current conflict taking place its danger is amplified significantly. The Iranian government has effectively closed the straights, and have been known to attack civilian oil tankers transiting through from western countries. For reference, this is what it looks like on a map:

Right now economists see WTI crude going to $100 by month's end. If that happens, the price you pay at the pump will be in the $3.50-$4.00 range. One week ago the average price of regular gas was $2.90/gallon, as of today the average price per gallon is $3.45. If WTI crude hits $100/barrel he annualized purchasing power of the United States would drop by some $30 billion just from a $10 increase in a barrel of oil. That's how dependent we, and your portfolio, are on oil.

The United States is a net exporter of oil, however we still receive around 500,000 barrels per day through the straights. Despite not being directly effected on a meaningful scale, the price of global oil is a huge risk. Roughly 20% of the entire world's oil transits through the SOH everyday. Think of it like this: 100 people are at an auction for 100 loaves of bread. Suddenly, 20 of those loaves are taken off the table. The 20 people who were going to buy them don't just go home—they start bidding against the other 80 people for the remaining bread. On top of that, imagine a risk-premium that now must be paid because there is no guarantee that next time there are only 70 loaves of bread.

That's the oil situation we're in right now, and China/India are the 20 people who will start driving prices up.

ONE LAST THING: While the U.S. as a whole is safe, California is the outlier. Because of its lack of pipelines connecting it to the rest of the U.S., California still gets about 20-25% of its foreign oil from the Persian Gulf. If the Strait closes, the West Coast feels the "Oil Shock" significantly harder and faster than the rest of the country.

Jobs, or Lack Thereof 

The unemployment rate for February ROSE to 4.4%, from 4.3% the month prior. What's more, non-farm payroll data showed that the United States LOST 92,000 jobs last month, missing expectations of a 60,000 job gain. There is a hidden red flag within the report as well. Not only were February jobs numbers abysmal at best, but December's numbers were revised down! December non-farm payrolls were revised down by 65,000 jobs, ultimately bringing the report to a negative number. This means that three out of the last five months the United States has had net negative job growth.

Here is a chart of Non-Farm Payrolls back to the late 1990s. Notice the periods where we saw more than 90,000 jobs lost, noted by the red vertical lines.

We've talked at length in our previous newsletters about big tech layoffs and tightening liquidity. What's interesting about this specific payroll data is that it wasn't just big tech cutting jobs. In fact, job losses are bleeding into some of the most reliable sectors. Healthcare saw net losses of 28,000 jobs! That's significant because in a world where health needs never stop, that sectors is typically fully employed.

The Federal Reserve and the Stagflation Trap

Keep unemployment low and inflation under control, those are the two mandates given to the Federal Reserve. Right now we have clear signs the labor market is cracking, unemployment is on a steady uptrend, and even safe sectors are experience job cuts. On the other hand, the primary driver of inflation, oil, is now set to spike prices and nobody knows how long it will last. These contradicting indicators lead to a dangerous economic environment called "stagflation". Stagflation is slow growth, high unemployment, and high inflation. 

The last time the United States saw true stagflation was in the 1970s inflationary crisis. We aren't there yet, but the ghosts of recessions past are flickering the lights at the New York Stock Exchange. 

Stagflation is extremely dangerous for the economy, and now the Federal Reserve has to choose between the possibility of stagflation against the near certainty that oil prices will remain elevated. Currently, Kalshi betting markets are predicting a 3% chance that the Fed will CUT rates at their next meeting, which is scheduled for March 17-18.

Mark your calendars, the press conference after the rate decision will be very telling. We will get a better sense on which direction the Fed wants to go given these unprecedented circumstances.

In Short

• Gas prices are rising, and show no signs of dropping anytime soon. We don't believe that President Trump wants this, so there is reason to believe this conflict will come to an end very soon. 
• Jobs data was horrible, and is showing signs of recession. The non-farm payroll data showed a net loss of 152,000 jobs in February. 
• Stagflation = Slow economic growth, high unemployment, and high inflation. This is a very real possibility that the Fed now has to contend with. 

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Thanks for reading! Until next time, good luck and Godspeed.

Disclaimer:

The views and opinions expressed in The Pioneer Perspective are those of Daniel Harlow and Pioneer Financial, LLC and are provided for informational and educational purposes only. Nothing in this publication constitutes financial, investment, tax, or legal advice.

Market data and information are obtained from sources believed to be reliable, but their accuracy cannot be guaranteed. Past performance is not indicative of future results, and all investments involve risk, including the potential loss of principal.

Readers are encouraged to conduct their own research or consult a qualified financial professional before making any investment decisions.