Rates and Oil
Two weeks ago, we noted that Federal Open Market Committee (FOMC) Chair Kevin Warsh indicated that the FOMC would remain inflation focused. We also noted that renewed hostilities with Iran pushed crude back closer to $100. This week, we had an update in both items and thought that we would take a minute to mention how they have further impacted rates.
In July, we noted that the situation in the middle east was a risk to the global economy and financial markets. In addition to 20% of global oil output, the closing of the Strait of Hormoz impacted chemicals and fertilizer, which has contributed to supply chain and food shortages around the world. To consumers everywhere, the price of gasoline, diesel and jet fuel went observably higher. This clearly contributed to increased inflation over the summer with consumers around the world paying more at the pump but also increased transportation costs creeping into the price of all goods.
Oil, on the other hand, moved between $70 and $100 over the summer, remaining volatile with the daily state of the war and seemed to shift with social and tradition media posts from the US Administration. We were surprised that crude did not go higher. We had expected and prepared our portfolios for a more dramatic rise. The reasons that it didn’t rise as fast as we would have otherwise expected come from a number of technical reasons that we don’t have space to get into here (Chinese & US strategic reserves, upgrader mix shifts) but one of the clear relief valves was the Saudi East-West pipeline which gave 20-25% of middle east stranded oil an egress to the Red Sea. This week, the pipeline was attacked by the Houthis and subsequently shut down. Brent Crude immediately jumped to $115.
Both issues collided at the fall FOMC meeting on Wednesday with the unanimous decision from the Fed governors to raise interest rates. This was welcomed by the market (with decreasing inflation expectations) as was taken as a positive single of continued FOMC independence.
“This means that” the inflation situation is becoming more concerning for central bankers. A combination of increasing prices, a dramatic increase in the interest burden from the total US debt balance and the jump in crude meant that the FOMC had no choice but to raise rates. Figure 1 presents the data highlighted in red.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
Changes in Leverage. We are increasing the asset ceiling to 2.0 times the market value of equity for Pathfinder International Fund and Pathfinder Conviction Fund to be consistent with Pathfinder Partners’ Fund and Pathfinder Resource Fund.
Telephone Call Recording Reminder. To maintain accurate records and support quality service, please note that all telephone calls with our office are recorded, in accordance with applicable privacy laws.
For more information, please follow the links above to review the fund term sheets.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Pathfinder Conviction Fund are presented based on the master’s series of each fund. The Pathfinder North American Equity Portfolio and The Pathfinder North American Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder North American Equity Portfolio (January 2011), Pathfinder North American High-Income Portfolio (October 2012) Pathfinder Partners’ Fund (April 2011), Pathfinder Conviction Fund (April 2013), and Pathfinder International Fund (November 2014).
Pathfinder Asset Management Limited (PAML) and its affiliates may collectively beneficially own in excess of 10% of one or more classes of the issued and outstanding equity securities mentioned in this newsletter. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor PAML can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your portfolio manager, who can assess all relevant particulars of any proposed investment or transaction. PAML and the author accept no liability of any kind whatsoever or any damages or losses incurred by you as a result of reliance upon or use of this publication.