Widow-maker trading | Energy & Inflation | WTI & SPR [The Week Ahead - 19 Dec 2022]
Hi, and welcome to The Week Ahead. I'm Tony Nash. Today we're joined by, by Bob Iaccino. Bob is with Path Trading Partners. We're also joined by Josh Young. Josh is with Bison Interests, and Tracy Shukart, who is with High Tower Resource Advisors.
Guys, thanks for joining us today. And Bob, I know this is your first time to join us and I really appreciate you taking your time. I'm always really shocked by the the quality of people who will talk to us, which is just amazing.
So it's, it's great to have you here. And Josh, this is your second time and you have just hit a lot of home run since your fund started. I think you're up 140% or something while the industry index is down like 20% or something. Is that right? I can't talk about my performance. Okay. So I think you're doing pretty well.
So I'm just really grateful to have you guys here. We've got a few key themes here. Of course, there's been a lot of macro data out and some of that stuff has been classified by a few people as kind of widowmaker trades. So let's get a little bit into that with Bob. We're going to look at energy and inflation and Josh is going to lead on that. And then we'll look at WTI and the SPR with Tracy.
So Bob, let's start. You had sent this tweet out from Emma a few days ago where she says that markets kind of are believing what they want to believe and it's really a trap and some of them are kind of widowmaker trades. So can you talk us through that? Of course. We just had the the big Fed meeting with a 50 bps rise and JPowell now insists that the terminal rate is 5.5 or somewhere around there.
We saw PMIs come out today that were a lot lower than expected. We saw a downward revision in unemployment by over a million jobs sorry, of employment by over a million jobs. So why do markets continue to want to see a rosier picture or where are we right now and where is it going? Well, it's interesting, Tony, and again, thanks for having me. When you're looking at equity markets specifically okay, let's just talk when we talk about markets in a general sense, we're usually talking about equities, which is one of the things I think the mainstream gets wrong.
But when we're talking about equities, you're talking about just a natural upward bias. There's many millions and billions of dollars that go into 401ks and long only mutual funds every single month that people don't even look at. So when all else is equal, you have a slight upward bias in equities. And therefore it kind of stands to reason that people in general, investors, retail investors, want things to go up. And I suspect when somebody starts trading I remember I gave a speech pre COVID and somebody came up to me and said, I don't understand how you trade the ES, which is S&P futures. I said, what do you mean? They said, well, stocks always go up, right? So sometimes you can be short ES.
And I'm like, oh, my Lord, let me show you a chart. Stocks don't always go up. If you take a look at an equity chart going back to 1920 or however long you want to be, yes, it is angled this way. But when you see what's going on right now, there's a lot of old adages in the markets that I honestly can't stand. But one of them gets repeated a lot is, you can't fight the Fed.
And most people are trying to fight the Fed. And Jerome Powell keeps coming out there and says, why are you guys fighting me? So the more and more stern Jerome Powell gets about interest rates, the more and more the markets get comfortable with what the Fed is doing and saying, sort of, and I'm paraphrasing what I think the market would be saying as a whole, "okay, we know what you're doing now, so we're comfortable with it, and we're just going to buy stocks." And that seems to me to be troubling. It's interesting because I'm bearish medium to long term, but I own the S&P Futures right now.
I actually bought them on the first day of the fourth quarter with a mindset toward this type of activity. I said, okay, the fourth quarter is going to be higher than the third quarter, so I can go ahead and buy a small ES position within the context of my thesis that toward the end of the first quarter, beginning of the second quarter, I think equities dump again. I don't think that the lows that we saw in October are the ultimate lows for this particular bear market. So you're saying that selling out of Trump's NFT doesn't mean we've hit the bottom yet or whatever. I took screenshots galore of that Trump Superman thing with the laser.
I'm like, if he could have a body like that, so can I, right? By eating McDonald's and drinking Coke. I thought that was amazing. . No, I mean, again, these kinds of things a lot of people would think is peak bullishness just in any market overall. It certainly is probably peak bullishness, at least in the short to medium term and NFTs that that happened. Hi, everyone. Wanted to let you know about a promo we're
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Why do you think we'll continue to see ES rise through, say, first quarter? Like, what are you seeing? Is it sentiment or is it some of the data coming out? It's the data being done and it's the big events being finished. So, again, as I mentioned the beginning of this conversation, Tony, all else equal equities have an upward bias. And I said to myself, okay, we've got one more Fed meeting, one PCE, one CPI, a couple of small to medium sized business PMIs in the form of the S&P PMIs, and then not a whole lot. So given that backdrop, people say, okay, we're still near enough to the lows, or this is probably the lows. Even some of the people that I respect a lot think that the October lows are the lows, and I just happen to disagree with them going into next year.
But they're probably, they're likely this is not a bold statement, the lows for 2022. It's not a very scary thing to say considering we've only got, what, ten trading days left, 20 trading days left at the most. So from that perspective, I feel very comfortable with the buy at the end of the third quarter and sell somewhere near the beginning of the first quarter position that I put on and I have a break even stop. I mean, I'm not going to lose money on this trade, which means I'm not going to pay a whole lot of attention to it anymore. Right? Okay, very good.
So, Josh, let's talk about the data for a minute. Josh highlighted a chart that was sent out today looking at the difference, say, the divergence between hard and soft economic data. And hard economic data is still relatively positive, significantly more positive than the soft data. So can you help us understand what's the difference between hard and soft data and then what's your view of the divergence between hard and soft data? Yeah, so I focus more on sort of the energy side than the general broader market data side. But it is interesting.
So the hard data and my understanding of this is the measures of actual activity and the soft data is more measures of sentiment or sort of modeled or forecast activity. And then I guess where I sit on it is I'm looking at actual oil and gas consumption data, and it looks a little weak. And so when I look at it looking a little weak, and that doesn't mean I'm bearish I like the supply situation a lot. It's very bullish, and that probably overwhelms. But from my perspective, tracking oil and gas consumption, it looks like maybe some of this ostensible hard data isn't as hard as it's represented. So that's my take on that.
Let's talk about that a little bit. Bob, you seem to be a little bit skeptical of some of the hard data. Yes. What do you think is a little bit overstated right now? Well, I'll give you an example. This past non farm payrolls report.
Negative 40,000 on retail jobs. When have we seen that going into a holiday season? It's likely that a lot of it has to do with seasonal adjustments in my view, because how do you correctly adjust for seasonality that changes every season, along with technology changing every single season at a rapid pace what seasonality may or may not look like? So I'm not a conspiracy theorist by any stretch of the imagination, but hard data produced by the government is where there is possible manipulation. I'm not accusing anyone of manipulating anything. I'm just saying that's where it's possible. In sentiment data, that is the survey respondent sentiment. That's what it is.
And that generally shows up in hard data. Josh mentioned in his tweet about this divergence between hard and soft. Right now we have a divergence between iron ore and crude oil prices, right. Which has a very positive correlation over time. We can look at the data.
Josh can look at the data, and so can Tracy better than I can, and say, okay, I believe these will converge, and I think this one will leave because it's data. Sentiment, you can't say, that's not the respondent sentiment, whereas data coming out of the government, if you believed the government's data isn't manipulated, then the data is what it is. But when you look at something so strange as retail employment falling going into the holiday season, that's either economically catastrophic. Is that a word? Economic catastrophe? Sure. Catastrophe. Economic catastrophe.
Or it's wrong. One of the two. Catastrophic. That's what it's right. And we have all these huge revisions and the employment data every month, right. Going back, they'll revise two, three months back. They'll revise two years back, Tracy.
There are generally four revisions on OECD country data, and so they'll go two years in and revise stuff. And whenever I see an initial kind of print of economic data, I always say, and you see this regularly on Twitter is I say, I'll wait for the revision. And it's not the first revision. It's typically the second or third revision. My view is that the first two say the initial print and the first revision are really PR for every macroeconomic print. Not just in the US. Globally.
And then we start to kind of see back adjustments of what really happened. So I just don't understand why initial prints of economic data move markets. I don't understand why the financial media make a big deal about these initial prints of data because they're wishful thinking.
In the same way, Bob was talking about how investors have a rosy view of stocks always going up. Macro data typically has the bias of those government statisticians either too negative or too positive. Okay, good.
So is the view, guys, that the soft data will pull the hard data down? Is that kind of where we're kind of falling on this? It's definitely my view. Okay. I mean, again, if that's your sentiment, something has to happen to flip that sentiment. I always like watching the politicians.
I don't make political statements on shows like this. I make political statements, unfortunately, at the dinner table. But when you're talking about political statements, you'll see jobs are strong and you're making enough money to pay for the inflation. That doesn't change the reality on the ground for people.
You're not going to actually have somebody say, well, the President said, I have the money to pay for this, so everything is fine. So I always believe that the sentiment is much more reliable than the data, even though it shouldn't be that way. It really should be the opposite. Josh runs a fund and he can't talk about his performance even though the performance is real data. That's what his performance is.
I was at a fund of funds years ago as part of the investment committee. We had nine full disclosure, was a low volatility fund. So our biggest up year was about 90 basis points. But we never had a down year. I'm sorry, 3.9 basis points, 390 basis points.
But we never had a down year in nine years. And our auditors and our regulators said we couldn't publish that performance. And when we said why, they said, because it implies that you can't have a down year. Well, yeah, if you're stupid, it implies that. Right. But, you know, this was our actual performance, but we can't put it forward.
Josh has great performance and can't talk about it. And this is the same kind of thing where to me, the sentiment will pull the actual data down and then you question whether that's going to be manipulated for political gains or not by either side. Right, exactly.
Not one party or the other. It's both parties. Absolutely. We don't figure that anybody individually. I mean, I think the employment data has been wrong all year, for two years now. You just look at labor force participation rate and how many people are multiple jobholders, not single job holders. And we just had that huge revision of 1.1 jobs.
Yeah. So we saw jolts turn over a couple of weeks ago and then we have this downward revision of jobs. So if we look at the Fed's mandate, they're kind of not really doing either, right? Either they're not doing either or they've already achieved the job stuff which they said six months ago that they hadn't achieved and they continue to persist that they haven't achieved.
So is it fair to say that with the downward revision and employment data and the downward trend in jolts data that they're kind of getting there already? So this is kind of a bad news is good news thing potentially? Potentially if the market chooses to read it like that. I don't think the algos know how to read it that way. But yeah, I mean, it's possible.
We already are at 4.5% with all these revisions on unemployment. Right? Okay, very good. So we're going to get off the macro data for a minute. We're going to move to energy prices.
Actually, we're going to stay on some macro data for a little bit. I put on the screen our Complete Intelligence CPI forecast and what we're looking at potentially is a gradual rise of CPI accelerates a bit in April and goes into the summer. So it's possible, according to our forecast, that we do see a second bump in CPI.
I have to say there is no human intervention in this. This is all machine driven. And so we're reading things in the markets or the machines are reading things in the markets that are saying we could see a second bite of inflation coming in, say end of Q1 or early Q2. So Josh, the question for you is we've seen some weakness in crude prices and consumers are seeing a bit of break with energy prices, gasoline prices and so on. But we saw from the Fed meeting that JPowell doesn't see inflation abating anytime soon.
So it seems like it'll be fairly persistent. How do you expect energy prices to fit within that? Are you seeing energy prices accelerate quickly or do you expect energy prices generally? Of course, I know there are different segments, but generally do you expect them to kind of accelerate quickly or do you see kind of a delayed acceleration of energy prices? This is a great opportunity to run real briefly a potential economic analog to where we are in some respects. And the potential economic analog is the Asian financial crisis, the '97 and '98 scenario. And where that might be real similar to what we're seeing now is one, we're actually seeing consumer deposits start to fall with loans increasing. We're seeing mortgage rates start to fall even though the Fed reset or keeps raising rates.
And so we're seeing the housing markets start to clear and then we have this very low labor force participation, sort of similar to what you saw in prior periods. And you see this, they say, what is it that good times lead to weak men, and then weak men lead to bad times, and bad times lead to strong men. And sorry for the gender aspect of that, but just sort of the general idea. When I see all this, I think that there's a real chance that we see much higher consumption of real goods and real inputs.
And then when I tie that so that's relevant for the inflation question as well as for oil and gas in particular, because there is this huge non participating aspect of the labor force that is increasingly likely to participate as NFTs and crypto and various day trading, tech stock and other sorts of speculative activity comes down. And then there is this other aspect, which is that with oil and gas starting to come into China more, and other commodities potentially coming into China as they reopen and restimulate, there is the potential for inflation on raw materials and deflation on consumer goods and other stuff that China exports. And so it's a sort of very weird, messy time. I'm not sure, I think that tech equities rebound like they did after that '97, '98 time frame. But other than that, it looks like sort of the most similar to maybe that plus 2003, something along those lines.
And I'm interested in your guys take on that, because it seems like we have room, actually, for significant uptake in demand, not just in China, for oil and gas, even in the US potentially, as employment potentially improves, just because you have all these people, you have all these open jobs still, especially in the low end, and you have a lot more people who maybe are relevant for those jobs and more interest in them now. Yeah. So when you talk about uptake so if we look at China, for example, there were zero international flights going into China from, say, 2020 until, what, this month, right? Something like that. International tourist flights. And those are restarting.
And so that's just one kind of proxy indicator of, say, trade, the economy, travel, other things. Right. So do you have a view on that, on, say, passenger flights into China, tourism in China and how that would impact, say, crude? So I have a better view on China to China flights than China to international. It actually does look like there's a lot more bookings for international to China and vice versa flights, but there's not a lot more actual flights yet.
But there are way more China to China flights. We're actually up from a low of two weeks ago or two and a half weeks ago. We're up about 100%, actually, maybe even more than 100%. And again, the data is not perfect, but I've been posting daily seven day average lag data just to to sort of show a moving average, and the moving average is up over 100% for that.
So just those China to China flights, it looks like, represent about 200,000 barrels a day of jet fuel consumption and jet fuel is very oil intensive. You use more than a barrel of oil to get a barrel of jet fuel because of the energy component and because of various other aspects of that refining process. And so also, jet fuel consumption historically has been a good proxy for oil and gas consumption in an economy. If you're using more jet fuel, you're using more gasoline, you're using more diesel, you're using more coal and natural gas and various other things. It's a great sort of real time economic proxy.
And there's lots of this is one of the places where I disagree on the sentiment surveys. I'm an economist by training and education. And the problem with surveys is that there's no money in them, right? So people just tell you whatever they think, whereas consumption is actual money. It's a buying decision.
It's not a speaking or a writing decision. And the consumption matters more. So these real time actual consumption indicators are very promising, it looks like, from China, even as there's headlines of Beijing is totally shut. So the headline is that and then the consumption data is that the consumption is way higher.
I'm going to go with the consumption data, and that looks very promising. Again, that's only part of this theory, and I'm interested in your guys take on it to the extent that you're. Open to talking about bob was talking about iron ore earlier, and they came out overnight, actually, and said they have a state buying purchasing iron ore is how they purchase it now.
They started about a year ago, and so they said they're going to start buying iron ore again. So really, to me, that does say they are really getting ready to sort of push this stimulus, and they really want that 5% GDP for next year because of how much it has come down and how much has been lagging over the last two quarters, including this quarter. So to me, hint, not that just them saying no more COVID passenger.
I'm looking for real things that they're actually doing. So look for them to start buying hard assets and buying sort of in the material sector and that's kind of to me, that, okay, we're ready to stimulate this economy. Okay, that's fantastic for everyone, right? I don't think anybody in the world wants China to fail because it hurts everyone. There's such a big economy, and especially their Asian neighbors, but also their big trading partners like the EU and the US.
So I hear a lot of kind of sour China sentiment and people kind of cheering China failing. And I don't think anybody in reality wants that to happen because it would hurt all of us. So since we have three energy experts on, I guess let me ask you about China's position with their crude reserves. Are they pretty tight? Do they have a lot in storage? Do they have stuff contracted? Like, if they grow, how will that impact the spot price. Well, they will have to buy more because when oil prices were at their peak just a few months ago, even though they were closed, and even into 2021, when oil prices really started to spike higher, they used a lot of their SPR, especially starting in summer of 2021.
So they started using a lot of their SPR because they like cheap commodities and oil prices were Spiking. And so I do know that, you know, from what we can tell, you have to remember, we only know what's above ground that we can see by satellite. We have no idea what's underground for for what they have in storage.
I just want to preface that, because a lot of people say you don't know what time. So we do know some storage. So what we can see is that they have drawn down their SVR quite significantly.
If they start opening up and they need to purchase more, especially with kind of these oil prices lower and then being able to strike deals with Russia right now, I do think we'll start to see them purchasing a lot more, not just for consumption now, but to refill their SBR. Again, I'll defer to Josh and Tracy more about China. I'm actually much more knowledgeable about Japan than I am about China, but from a perspective of what they're likely to do there's, the interesting sort of component of Chinese culture can be quite monolithic. And if you have sort of spikes in COVID cases and it brings about this sort of I mean, they obviously protested Lockdowns, but there were reports overnight about Beijing looking like a ghost town today because cases were spiking again.
And you could see this potential sort of spike in demand and then drop off in demand. And that would likely be the last drop off where I suspect that the demand that we saw here in the US. China's demand, would increase three and four fold of the spike that we saw here in the US. Which is why I kind of agree with Josh's overall bullish sentiment, even though we haven't quite reached my downside WTI targets that Tracy and I talked about a couple of weeks ago. From that perspective, though, there is an interesting possibility of this downturn. But to Tracy's point, I don't think the Chinese government stalls their purchases because of their SPR usage.
It's called an SPR globally, but they certainly use it quite a bit more than we do here in the US. To manage their it's almost like a hedge account for them, where they sort of buy and sell much more rapidly in store. And they do the same thing with copper. And it's interesting because when the copper market started really getting into the headlines and Spiking three years ago, there was all this talk about copper inventory and copper being used as a currency in China. You can store copper for quite a bit longer than you can store fresh crude oil.
It's got to be rotated. So that's a great point. That's great. Okay, so speaking of SPR, Tracy, you punched out a chart this week on WTI versus SPR, WTI price versus SPR, and it looks like that divergence is pretty stark. So you guys just mentioned China drawing down their SPR.
The US. Has drawn down its SPR. So can you talk us through what this chart means and really what it means for crude prices? I mean, really what it's showing is it's showing all of the times that we've pretty much needed to tap into the SBR because of an actual emergency. You can see the difference between when we had to tap the SDR and say war or Katrina or Libya, right, how little that was compared to a non emergency event, that we drew it all the way down. Now, Biden has said this really just showing the magnitude of this SPR draw for literally no reason.
But if, you know, Biden did say that he was looking to refill it at 68 $72, we have gotten down on that in that area. We haven't really been able to stay there. But it is possible that we could be looking at, by our calculations, q Two, they could possibly be looking to repurchase if oil prices are down there, which there's no guarantees with China reopening and sort of seasonal tendencies and what have you. Generally, we see about mid February through summer really starts to kick in higher demand season, and you start refining for summer grades and things of that nature.
But it is possible that we could see the US. Kind of start at least thinking about repurchasing Q 223 again, that would buoy oil prices as well and kind of put a floor underneath it. Okay, so that kind of reinforces the headline CPI data that I put out there saying, say, March, April, May, things really could tick up. I think it's silly to expect crude to be down at that level, especially, as you guys say, if China is opening up, if they're refilling their SPR, if the US. Is refilling SPR, that sort of thing.
So that's all super interesting. Is there anything on energy that we're missing right now, guys? I just want to make sure going into the end of the year that we're covering the areas we need to COVID on energy. What are we missing? So I'll jump in on this just real quick. On inventories, there's a lot of uncertainty.
Like Tracy was saying, we don't really know how much oil is in storage in China right now. The way I approach it is just to assume the worst to some extent to to underwrite to that and then, you know, understand sort of upside. And the worst case is, is somewhat bad.
Like it looks like for, for oil prices, it looks like there might be two or 300 million barrels of oil and storage in China. More than some of the most optimistic analytics services or whatever are showing. And it is, in theory, possible, right? They have big caverns. They could store it like we do. It's possible.
To the extent that that's the case, it still might not matter, because as China reopens, to the extent on the low end, again, of Chinese consumption, maybe you get another 2 million barrels a day or so of consumption versus where it's been. And maybe they were importing a million barrels a day to store up until this point. So you still have a delta of a million barrels a day. And so if you have 200 million in storage, 200 days from now you're out of storage and you've been importing, you end up with this, like, million or 2 million barrel a day need to draw on world inventories. But world inventories are really low ex China. So you end up with a situation where on the low end for recovery, you end up with an undersupplied situation.
And that's not assuming any Russia disruptions on the high end, if you end up with a sort of three or 4 million barrels a day. Again, what Tracy and Bob were saying about the imports of iron ore and some of these other indicators, if those are right, and we end up on that sort of higher end of demand, which we also saw in the US. As we reopened, I mean, things could get crazy real fast, and China could end up looking like the world leader in oil trading from having imported and stored all of this oil to the extent they have it.
And then the last thing oil was in biden's buy target range, and they were selling from the SPR, not buying it in the last week or two. So that tells me it's very unlikely that there's repurchases of oil into the SPR anywhere close to these price levels and anywhere close to these economic circumstances. I mean, I think most people agreed they probably won't buy back in the SPR, but they say they will. But I think if that even happens, we won't see that until at least three of 2023.
But again, prices will probably be higher than where they want them to be to purchase it anyway. But I do lean towards the fact that it's going to be a very long time before they actually start repurchases. Okay, great. I have a couple of closing things, if I could, because first of all, I like Josh until he told me he was an economist. But I think that's more of a strategist.
We're like a strategist, and we're like the little brother of economists, and we're always jealous of that. They get to put the economists, find their name and strategists. I could just say I'm a strategist. No, I don't have to show a degree to do that. But from a perspective of the SPR, I worry about the political, the future political implications of what the administration did.
If you look at the exact somebody sent me the exact definition of what the SPR is supposed to be and I guess in that context he used it correctly, right? But I think I know at least Tracy and I agree that it was used incorrectly here because it was just a price increase. It wasn't really an emergency. Prices were coming off on their own. Biden's own. Treasury put out a report in July that said the SPR release only affect prices somewhere in the range of $13 to they revised that from about $28 to pump. So it wasn't even that big of an effect through Biden's own.
Treasury said this it's not me saying this, but I worry about the future of prices are up, let's dump a bunch because we've got midterms coming. And then next thing you know, there's a massive outbreak of some sort of geopolitical problem in the Middle East and there's a real emergency and we don't have what we need. So that's my concern about that. The last thing I'd like to say isn't really energy based, it's more about CPI. I was on a Twitter space yesterday waiting for the mic.
I never got the mic, and I heard somebody who I won't mention say prices are decelerating at an accelerating rate when the exact opposite is actually true. Prices are accelerating at a decelerating rate. They're not decelerating an accelerating rate.
People forget. First of all, I don't like the Consumer Price Index, but that's a whole nother podcast. CPI is exactly that.
It's the consumer price index. It's an index. If you go to the St. Louis Fred website and you look at a chart of CPI, it's basically always increasing, right? That's why the Fed's target is a 2% increase in prices. If we're in the midst of disinflation, not deflation. And I think sometimes the public doesn't realize, they're like, oh, prices are coming down.
No, they're actually not. The rise in prices is actually slowing down, but they're still rising. It's like if you went to buy a car for $22,000, I don't know where you'd get that, but and you go the next month and it's up $23,000, and then you go the next month, that's up 23,100. Prices didn't go down, they just increased at a slower rate.
And I'm going to be saying this everywhere I appear from now because I think the public's misunderstanding of what's happening with inflation, maybe I'm going to affect sentiment if I say it too much. Josh, I don't know. But that's the issue I have in terms of CPI specifically, and energy is obviously a huge part of that. Well, I tweeted out almost the exact same thing this week about CPI, about inflation, and inflation isn't falling right. The rate of price rises is slowing and there's just a huge misunderstanding of that. So before we close up, as we go into these last ten or so trading days of the year.
What are you guys thinking about over the next couple of weeks? Is there anything that's on the top of your mind as the year closes? Josh, let's start with you. Sure. So people have talked a lot about this. We haven't talked about this yet. The divergence in between oil prices and oil and gas stock prices, especially on the large cap and mega cap side. And I think people forget that commodity prices other than the spot price are not predictive.
The forward curve is not predictive. It's terrible. It's used as a hedging mechanism that's used as a prediction mechanism.
Equities are forward looking and they're not perfect, but they're one of the best prediction mechanisms that we have. And so energy stocks, oil and gas stocks are telling us that oil prices are likely to be higher, similar to your analytics software and the pundits and what. The sentiment is terrible in saying that oil prices will be lower and the price has deviated in the short run with the equities. So it does look like the more likely scenario, just even using that heuristic, is that oil prices go higher again, ignoring all the fundamentals and whatever.
And so the interesting thing is, if that's right and oil prices go higher, it might send those oil and gas stocks even higher. Right? There's sort of this sort of soros reflexivity that happens with those sorts of things. So I think it's worth touching on.
Many people are posting about it, talking about how they need to converge. And actually I just think you got to understand what they are and what they are. That's a good point. Tracy, what are you thinking about going in last two weeks now? That chart is everywhere.
To be honest, I'm still looking very closely at open interest in the oil and gas mark, oil in particular. A lot of length has come out of that contract. People just aren't interested. A lot of people took profits because it was one of the more profitable commodities. Right. Over the last year or two years,
we haven't really seen anybody actively short that market short. Open interest has actually declined a little bit, but not as much as length. So if people get interested in this market again, there's a lot of room to the upside if people jump in because that length has been taken out of the market.
So I'm watching that towards the end of the year in particular, see what happens after the beginning of the year. See if this market find some more interest. Okay, all three of you are being pretty subtle about your expectations for energy prices.
Bob, why don't you close out? What are your expectations going into the last two weeks of the year? First of all, I agree. I think there's almost I shouldn't say this, but I think there's almost no way energy prices continue lower on the crude oil side and natural gas is doing what natural gas is going to do. So I think overall energy prices go up.
Electricity prices are going up. And given that backdrop, if the three of us are right, by the way, if I mischaracterize what you two think, please jump in. If energy prices go higher, there's very little chance in my view, that of the three possible scenarios for the Fed that the right one can come true in the Fed's view. So I'm actually more looking at EPS estimates for equities need to come down, earnings estimates need to come down, and the Fed is either going to have to a admit to a higher inflation target or B accept a higher level of inflation without saying so, or equities have to make a new low. And when that low happens, if that low happens, I should say if it's a very good opportunity for industrials and consumer staples to sort of get in and kind of ride the recession wave back up as the economy itself restrains inflation by us going into some sort of a shallow or deep recession. The other two things I would say is there any way I can get an economist title without putting in the work that Josh did? If anyone knows how to do that, absolutely.
Just put it on your bud, Josh, don't let me do that. You actually worked for it. And then the last thing I would say, if anybody wants to send me a bottle of Blantons, I'm willing to give you a free trade that is guaranteed to either make or lose money. Hey Bob, just kind of latch on to what you just said about energy prices rising and industrials. So we've seen through 2022, a lot of industrials and retail firms raise price.
Okay. And consumers have accepted that price. But if you're saying that commodities are generally going to rise yes. Does that mean that we'll see margins compress for those industrials okay? So in the short term, consumers are. At a threshold where they can't accept higher prices soon. So if you guys remember, you look back to the Great Recession in 2008, the last thing people did was let their car be repossessed. That kind of shows you the inelasticity of energy demand in general.
People were defaulting on their mortgages before they let their car payment go into default. So from that perspective, people might be overestimating how far demand for energy can drop even in a recession. I'm making a correlation that probably isn't accurate, but just anecdotally that's something that we've seen.
And it's the same thing with heating and cooling your home. People are probably less likely to stop heating their home. They're probably more likely to accept cooling at a little bit hotter of a temperature. So going into summer it may not be as apparent, but I do think that when we come out of it, industrial utilities, energies and consumer staples are going to lead us as most times coming out of recession simply because of the first things that people start spending again on and they're the last things that people stop spending on. So I like those things coming out of what I expect to be a fairly decent drop and end of the first quarter, beginning of second quarter next year. Very good, guys. Thank you so much.
I really appreciate your time. This has been fantastic. So have a great weekend. And have a great weekend. Thank you. Cheers, Gail.