Oil prices are soaring, the labor market is slowing, and one area of the credit markets is blowing up. Is the year 2008, or 2026?
Yes, there are some similarities between now and what happened before the Great Financial Crisis. The biggest difference, people argue, is that back then, rising commodity prices were demand-driven, and right now, oil prices are soaring because of the war on Iran. So what should the Fed's response be?
If this were merely a war-induced supply shock, you'd expect interest rates to fall on a slowing economy. Instead, rates are rising. Even after the jobs report this morning showed the surprise loss of 92,000 jobs last month, the 10-year Treasury yield is nearing 4.2% this morning, up from sub-4% before the Iran attacks.
And that's because oil prices keep shooting higher. Our U.S. benchmark West Texas is nearing $90 a barrel, up from a low of $55 in December. Gasoline prices have shot up to $3.32 a gallon nationwide already, up from $2.89 a month ago. Food prices may be next. The top performer in the S&P 500 today is a fertilizer name, CF Industries. A third of the world's fertilizer supplies also travel through the effectively closed Strait of Hormuz.
But remember, we were already seeing a big rally in commodity prices before the war began. The best performing sectors of the year prior to Feb. 27th were energy and materials because of the "capexapalooza"--the massive capital spending cycle we are in right now. Metal prices in particular have been soaring.
Back in 2008, as Carlyle's Jeff Currie points out, we were also in a huge global capex catch-up cycle after capital had been over-allocated to tech during the dotcom bubble. Oil, natural gas, aluminum prices were all soaring to record highs even as the labor market was slowing in the first half of 2008.
What turned that from a mild economic drag to the terrible global financial crisis was the credit markets. We have made a number of reforms to try and ensure that a "Lehman moment" doesn't happen again. But I might argue that the biggest job for the Fed right now is not to determine the exact right level of interest rates, but rather to make sure that software doesn't become the new subprime.
The private asset industry, where today's software losses could now be sitting, can play a role in this, too. BlackRock, for instance, is one of the worst names in the S&P today after reportedly limiting withdrawals in HLEND, a private credit fund it acquired as part of HPS last year. The more transparency and disclosure these firms can provide, the better to keep investors from overly panicking. Perhaps some reminders that we got through the real estate "gating crisis" of 2022 would help, too.
It will be hard enough to navigate stubbornly high commodity prices with a sideways grinding labor market and have the economy come out of this okay. Here is a chance to make sure that we don't wind up in an even worse pickle.
See you at 1 p.m!
Kelly