This Week in Summary 6/17/2022

Jun 17, 2022 | Bubble Monitor

Bubble Monitor 6/17/2022


Did the world just end? A crazy high 75 bps interest rate hike crashed the market for the week ending Thursday 6/16/22. Whether or not this bubble burst was warranted according to the academics, in the real world, this represented a huge amount of wealth destruction. Ordinary Americans saving for things like retirement and college will not be quick to forget this latest round of market instability or the Fed’s insensitivity to their financial frailty. A huge financial services industry has long pushed the narrative that stocks need to be a core portfolio holding to meet savings goals and now we come to see that the Fed is not honoring their end of the bargain to treat the capital markets gently. In anticipation of this, many diversified into cryptos which promised to be a hedge against a profligate Fed only to find this week that their punishment was even more severe. One lesson to learn from this week’s carnage is that there is no place to hide from the Fed’s blunders. Maybe it is time for society to consider if a few unelected Fed board members should hold so much sway over the country’s financial future.

Weekly Spotlight

The question that should be on everyone’s mind is how will the Fed’s humongous interest rate hikes help tame inflation? In our post, how does higher interest rates lower oil prices, we highlight the fact that the sky-high price of gas is not from an overheated economy (with 1Q22 GDP down -1.4%), but from a supply shock. It’s crazy for the Fed to bludgeon lower already tepid demand with these rate hikes. Taking a further look at energy, we explore how the rising cost of oil extraction is making gas too expensive for consumers and perhaps the real reason for the push towards green energy. Lastly, we put the Great Resignation in perspective by suggesting that perhaps it is a healthy sign. Of course, the same cannot be said about the declining US fertility rate (see Elon’s thoughts on this) which could be worse than hiking interest rates during an economic contraction. 

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15 Second Posts

What is the Federal Government’s Job?

A couple of weeks ago we conducted a thought experiment in which the government became a nonprofit, and this week we propose another thought experiment in which the government becomes a public corporation. We suggest that this could provide very useful input into the debt ceiling debate.

The Importance of the Balance Sheet in Financial Analysis

While most investors are focused on sales growth & margins, they would be well served to further consider the strength of a company’s balance sheet. We look at BlackRock’s financial condition as an illustrative point.

The Importance of Free Cash Flow in Financial Analysis

Cash represents the lifeblood of all business enterprises which is why it is important to analyze free cash flow which we define as operating cash flow minus capex, dividends, and stock buybacks. We illustrate DoorDash as an example of why cash flow analysis is so important. 

Lessons From Tucker Carlson

There are many theories about why Fox booted Tucker Carlson, but it may be a very simple reason which can instruct everyone involved in the consumer retail segment.

It is Imperative that Climate Change Regs Incorporate Economic Reality

This week we spotlight efforts by international agencies to lower the earth’s temperature by imposing onerous regulations on energy producers. We suggest it will be better to: begin a process of implementing continuous improvements designed to support both economic & climate progress; and use international organizations to share tech & best practices as opposed to providing them with regulatory powers best left to individual nation-states.   

Part 3 – It’s Nice for the US to Save the Climate, But What About the Rest of the World?

In our last 2 posts, we outlined the probability that the UN’s push to lower the world’s temperature by -2 degrees Celsius could drive significant U.S. energy price hikes & shortages. How is this going to help as Asia ramps up the use of coal? Can humans lower the earth’s temperature anyhow?

Part 2: Who is Left to Make Investments in Fossil Fuels & Clean Energy?

There is not a lot of incentive for profit-seeking companies to invest in demonized fossil fuels or in clean energy projects lacking ROI. This points to substantially higher energy prices and supply shortages that will have a profound economic impact.

Part 1: Ramping Energy Demand Clashes with UN’s Environmental Goals

From 2021 to 2050, ExxonMobil forecasts that 85% of the population growth will be driven by developing countries, which in turn, will drive a +15% increase in energy demand.

What if the Federal Government Was Turned into a 501c3 Non-Profit?

Given all the focus on the debt ceiling, we propose a thought experiment in which all 100 federal agencies must compete for charitable donations. If taxpayers get to choose for themselves what to fund, what might we learn? 

Like Sinatra Croons: “So you see it’s all up to you, you can be better than you are.”

The top-paid hourly workers are currently enjoying the fastest wage growth, indicative of the current challenge to recruit & retain a skilled labor force.

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