Before we get going, I have to brag on one of our team members. This past weekend my brother and fellow advisor, Andrew McDowell, won the Indian Bayou golf club championship! Congrats to Drew!
The other, not-so-positive news of the weekend was the drone attack on Saudi Arabian oil facilities which sent oil prices up double digits overnight. It was the biggest oil price spike in decades.
While oil prices quickly retreated later in the week after the Saudis announced that the facilities would be back online shortly, we believe there are two key takeaways from this event.
First, the widespread use of drones by foreign countries and rogue political actors is upon us and seems certain to increase in the future. The attempt on Venezuelan President Nicolas Maduro’s life last year with a drone one could purchase at Best Buy will likely be remembered as the moment we crossed that particular Rubicon. It’s long been said that global infrastructure and electrical grids are significantly exposed to cyber-attacks. Now it appears that both are also vulnerable to drone attacks.
Perhaps most importantly to American investors, though, is the lack of an earth-shattering fallout in financial markets following the attack. For most of recent history, oil prices surging 15% overnight would have sparked panic selling by American investors as the country was heavily dependent on foreign oil. This is evidenced by the fact that multiple recessions in the latter half of the 20th century were brought on by “supply shocks” like rapidly rising oil prices rather than the Fed tightening/bubble popping recessions that have characterized this century’s downturns.
The U.S. is now the most prolific producer of oil globally, but it’s only in the last few years that we’ve begun to export in earnest (see chart below). This has been a deflationary and stabilizing force in the global energy market. We only ship out a sliver of our production compared to other export leaders like Saudi Arabia, Iraq and Russia, who have very little domestic demand for the “black gold.” North America’s ability to expand and sustain production quickly in response to rising prices appears to be diminishing oil’s power over the domestic and global economies.
From there we move to a WSJ article discussing AT&T’s consideration of selling or spinning off its struggling satellite TV business DirecTV. The internet, television and content industries are all colliding at breakneck speeds. We’ve been paying a lot of attention to those corners of the market lately because we believe that more opportunities will arise as the traditional cable bundle continues to erode.
If AT&T decides to jettison DirecTV, it will mark the end of a sad corporate story and a shocking strategy turnaround from just a few years ago. AT&T bought DirecTV in 2015 at the peak of both the linear pay TV bundle and satellite TV in general. That’s when broadband internet started becoming a “necessary” service due to the rise of Netflix and Hulu which largely destroyed the value proposition of satellite. Why pay $300/month for satellite when you also need internet to watch Netflix and can’t bundle them together because it’s an entirely separate service usually provided by different companies? In fact, a huge chunk of the aggregated “cord cutting” statistics are really folks “satellite separating.”
The good news for AT&T is that they have a ton of cash flow, direct monthly billing relationships with tens of millions of households, trade at a huge discount to Verizon and would likely be rewarded by the market for simplifying their business model.
We finish the week with a CNBC interview with bond guru and DoubleLine Capital CEO Jeffrey Gundlach who discusses the Fed’s quarter point rate cut this week. (As a side note, it says something about the “stickiness” of Big Tech platforms like YouTube that I instinctively go there rather than the original source, CNBC, to find and watch this content.)
The most thought-provoking quote from the interview: “Underneath the surface of all of this (rate cuts) is the desire to get interest rates substantially below the inflation rate and keep them there. That’s what the BOJ (Bank of Japan) has been trying to do forever and what Europe (the ECB) has been trying to do. It seems that we’ve been pivoting in the United States towards a warm embrace of that policy and it is a way of slowing down the debt compounding problem.”
In other words, as long as inflation remains above nominal interest rates for sustained periods of time, real (inflation-adjusted) debt levels actually fall. With that in mind, it seems logical to expect the Fed to want to continue to hold rates low and stoke some modest inflation for the foreseeable future.