Summary
Highlights
Mark Malik welcomes viewers to the Wall Street Truth Bombs Radar Report, promising to cut through market noise to focus on data and policy. He outlines the key topics: oil's war footing, wobbling AI trade, and complicated inflation figures. He encourages viewers to submit questions throughout the live stream and shares his early morning routine for market analysis.
Malik addresses a viewer's concern about dangerously low Strategic Petroleum Reserves (SPR) and the lack of mainstream media attention. He explains that countries have aggressively drained reserves to lessen supply shocks, leaving less cushion for future crises. He distinguishes between future (paper) crude oil prices and actual physical prices, noting that physical prices are significantly higher due to shipping and insurance costs. He highlights that zero ships passed through the Strait of Hormuz today, impacting supply and price, particularly for Europe and Asia. He states that the next oil spike will be larger without the SPR cushion.
Malik details recent month-to-date increases in energy prices: Brent crude up 16%, US crude up 14%, and European diesel up 29%. He points out that European jet fuel is up 26%, directly impacting airline costs as many no longer hedge their fuel. He reiterates that current goods prices reflect oil bought months ago at higher costs, and that war risk insurance through the Strait of Hormuz has surged, adding significant costs to physical oil delivery. He concludes that market's assumption that the current oil situation is temporary might be incorrect, leading to a significant macro headwind.
Responding to a viewer's question about the S&P 500 remaining near all-time highs despite numerous challenges, Malik describes a market disconnect. He likens it to swimming in an ocean without knowing what lies beneath the surface, referring to macro challenges like Japan's economic situation, oil shortages, inflation, and AI stock overvaluations as 'sharks.' He anticipates a 'great reconciliation' where either stock valuations align with economic reality, or reality shifts to support current valuations, emphasizing the importance of understanding underlying risks even while investing.
Malik discusses the impact of the Strait of Hormuz on fertilizer prices, noting that 25% of global fertilizer passes through it. He explains that fertilizer, a crude oil byproduct, has seen significant price increases. This leads to farmers buying less, resulting in lower crop yields and subsequently higher food prices, a critical issue often overlooked by mainstream media.
Malik introduces the 'inflation head fake' narrative, analyzing recent CPI, PPI, and retail sales data. He acknowledges that CPI cooled by 0.4% last month, largely due to a temporary dip in energy prices measured in June, when a ceasefire provided brief relief. He warns this is a backward-looking indicator and that current July data shows crude oil and gas prices are already rising again. He emphasizes that the Fed is unlikely to be fooled by this temporary cooling, especially given their focus on fighting inflation.
Malik explains that the Producer Price Index (PPI), a leading indicator for CPI, also showed a cooler print, but he cautions against misinterpreting these figures. He reveals that while fuel prices declined, service prices increased, with gas stations boosting margins. He differentiates between temporary supply-push inflation (like oil spikes) which recedes, and sticky core inflation (services, rent, insurance), which the Fed is keen to combat. He argues that raising interest rates will torture consumers more but won't solve supply-side problems that the Fed cannot directly influence.
Malik dives into the US Treasury market, prompted by a viewer question. He explains that while treasuries are considered the world's most riskless instruments, their demand side is evolving. Historically, many entities (sovereigns, pension funds) were mandated to buy and hold treasuries to maturity. Now, foreign governments like Japan and China are buying less and even selling. This reduced demand, coupled with increased government supply (more borrowing), is putting upward pressure on yields. He points out that hedge funds are now significant buyers, but they buy speculatively, comparing treasury yields against other, potentially higher-yielding debt instruments, creating greater volatility and competition for government financing.
Malik outlines the economic calendar for next week, including University of Michigan sentiment, housing numbers, import/export data, and flash PMIs from S&P Global. He notes the start of earning season, particularly for tech giants like Google and Tesla, and potential impacts from financial sector earnings. He concludes with several 'truth bombs': the war premium is back in oil, oil drives inflation despite temporary cool-downs, and the Fed is likely to hike rates into a nervous market. He warns that cheap gas today could lead to higher inflation readings tomorrow, leaving the Fed little room to maneuver without causing further pain. He reiterates the importance of understanding underlying market realities, even if unpleasant, through Wall Street Truth Bombs.