May 2, 2025 – Stocks have recently rallied, but Jim Welsh at Macro Tides believes the market is still in a prolonged correction or early bear market, with risks of retesting recent lows. Hear what he has to say in today's interview with Financial Sense Newshour. Next, Jim Puplava and Robert Rapier discuss falling oil prices, driven by tariffs increasing recession risks. Though policy uncertainty is currently weighing on the broader energy sector, Robert provides his insights on which companies and segments of the energy sector may offer the best opportunity.
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Transcript
Jim Puplava:
Well, some of the good news for investors, after falling precipitously since March, stocks have been in a rally mode. How long will this rally continue, and what are the implications for the markets going forward? Let's find out. Joining us on the program is Jim Welsh from Macro Tides. Jim, I want to start with the major indexes as you take a look at the Dow, S&P, Nasdaq, all in rally mode, a couple of them approaching their 200-day moving averages. How far does this go in your opinion?
Jim Welsh:
Well, in Monday's weekly technical review, Jim, I laid out chart patterns and technical reasons why I thought the S&P could potentially rally up towards 5750. So, I think there's a little bit more ahead of us as we get into next week. The employment report obviously was greeted positively. The economy isn't quite as weak as people were worried about. So, the Russell 2000 is having a pretty good day today. But my expectation, Jim, has been that we're in a more lengthy corrective period, potentially a bear market, and that the low we saw on April 7 was the initial low that we would see a recovery take place, which has unfolded and has a little bit more to go. But I'm in the camp that believes that the trade stuff, the economy slowing, there's a lot of issues out there that are likely to lead the S&P to retest that low at 4835, and depending on how the economy is going, take it out. So, to me, we're coming up to what I think is going to be at least a near-term high over the next week or so.
Jim Puplava:
You know, it's interesting because tariffs have obviously dominated the market since February. And I think the markets were surprised in terms of just how stiff some of these tariffs initially were announced. Of course, they're backing this out, and you and I were talking just before we went on the air that at some point, this is hurting both the US, and it's hurting China. So, it seems to me it would be to both parties' benefit to come to some kind of resolution here before it gets worse.
Jim Welsh:
No, you're 100% right. The tricky part is both parties are going to want to do it in such a manner that they do not look weak to their constituents and the people of China, for instance. So, that's the delicate part. And of course, President Trump has a tendency to be full throttle, and you know, that might complicate that task. But you're 100% right. The interconnectedness between the US economy and the Chinese economy is significant, and it's a question of how long is it going to take for both parties to recognize that, all right, like it or not, we need to work something out for the benefit of both countries. I think it's going to happen. But until it does, you know, I think there are risks that are increasing for the US economy, not just for the issue with China, but across the board.
Jim Puplava:
And speaking of risk for the economy, you know, 70% of our GDP is consumption. And if you want to take a look at consumption, retail, it's sort of the upper-income individuals who, Jim, have done very well with the stock market over the last couple of years. If you take a look at the bottom half of the country, people that don't own a home or don't have a 401k, they've been struggling. And we know that the upper-income people, a lot of their spending goes along with what's going on in the stock market. So, if we were to get into a serious bear market, that would affect even upper-income people in terms of spending?
Jim Welsh:
Absolutely. Statistics came out, I think I had it in the April Macro Tides, Jim, where almost 50% of consumer spending is done by the top 10% of wage earners. And as you noted, the strong stock market, obviously, housing prices going up 50% over the last five years, you know, provides a level of confidence and willingness and capacity to spend. And therefore, they will be more vulnerable and sensitive to any meaningful decline that lasts for a period of time in the stock market. And I think there's a good chance, Jim, that we're going to see housing prices over the next year decline. And that, you know, bodes, you know, a challenge, if you will, as we get into 2026. If I'm correct, as the supply of homes increases, I think we're going to see prices sag. It's already happening in many parts of the country already. I just think it'll become more widespread as we get into next year. So, that would be another ding, if you will, on the top 10% earners who have been really the ones powering the economy over the last year or two.
Jim Puplava:
I know the housing market has been held up strongly because, you know, think of all the people that locked in on 3% mortgages. Why would you flip out of that and get a 7% mortgage? But Jim, at some point, there's got to be a peak in prices. I mean, California, our definition of a millionaire is a homeowner. You know, I've got a buddy of mine that bought a house in '98 for a quarter million, and now that house is worth 1.6 million. I mean, how many people realistically can afford to buy a beginning home for a million six at a 7% mortgage?
Jim Welsh:
Not many. And the reality is, Jim, excluding even California, if you look at the country as a whole, there's a chart that I've shown, and I did show it back in 2006, because in 2006, I was worrying that housing prices could drop by 30% or more. And basically, it's the ratio of income and housing prices. And that relationship, as you just noted in California, is extraordinarily stretched, but it's also stretched significantly for the country as a whole. So, that gap between housing prices and median income can only get closed by one or two routes. Either median income grows sufficiently to do that, but that would take years, or housing prices come down with a little bump up in median income. And I think that is what's coming as we get into next year, is we're going to see housing prices come down just because they're so stretched, and such a small percentage of people can actually afford to buy them. And again, the people who have been sitting with those great mortgages, you know, have been kind of comfortable, Jim, because the house keeps going up in value. You know, there's no pressure. But if somebody's been thinking about maybe downsizing or something, and housing prices start to fall, I think we're going to see some supply come into the market that will weigh on prices even more. So, I think the housing market could be vulnerable next year in a meaningful way, and that would be also another negative for the economy.
Jim Puplava:
Let's talk about one influence on the economy, and that might be what Fed policy is. Powell has sort of kind of walked back and let the markets know he's not ready to start cutting rates, even though Trump is wanting him to do that. And we've seen an uptick in inflation. What's your view on inflation here?
Jim Welsh:
Well, I think we probably saw the last good numbers on inflation in the last month for two reasons. As tariffs start to impact price levels over the next three to six months, we'll see prices rising. The other problem is that the takeaway values from last year for May, June, and July are really low, like 0.15% per month. So, I think it's entirely reasonable and possible that as we go out in future months, Jim, the month-over-month increases will be closer to 0.3, maybe even point four. So, I think as we go between now and the end of the year, the CPI and the PCE will go up at least on the annual rate, at least 50 basis points, and I think potentially could go up by 100 basis points. So, the Fed is in a tough place in the sense that they misjudged the 2021 inflation when they said it was transitory. And so, I think they want to make sure they don't duplicate that mistake. The other thing is, I think President Trump kind of shot himself in the foot with all his criticism of Powell and also alluding to, well, he might fire him. You know, it can't happen soon enough because if I'm Powell and the other Fed members, I'm going to be sensitive to, all right, our bias is to cut rates, but we're really going to need data that leaves no doubt that a cut is warranted because if they move a little bit proactively, there's going to be people saying, ah, they're just acting because Trump yelled at them. And I think the Fed doesn't want to have that look happening either. So, the Fed is torn between, gee, inflation is going to be ticking up at the same time. I do think the unemployment rate will climb. It's going to take a few months for some of this stuff, I think, to work its way into the labor market, Jim, but in the March meeting, the Fed laid out what they thought the unemployment would do over the next until the end of the year, and they thought it would end in December at 4.4. So, to me, that's an important number because if the unemployment rate starts ticking higher as we get into the summer and early fall above 4.4, I think the Fed is going to be more responsive to the increase in unemployment than the increase in inflation. And the other reason why they'll take that is they believe that the increase in inflation from tariffs is a one-time price adjustment. In other words, prices get ratcheted up, but it's not going to happen again next year and the year after. Therefore, you've got this bubble up in inflation of somewhere between 50 and 100 basis points. But as we get towards the end of next year, all else being equal, inflation numbers will probably come back to where they are right now. So, for all those reasons, Jim, I think the Fed is in a waiting game. Powell, next week at the meeting, is going to say the same thing he's been saying for quite a bit now, is that we're standing ready. We're watching both sides of the equation in terms of stable prices, maximum employment, and uncertainty levels are so high. But monetary policy is in a good position. I don't think he's going to say anything beyond that, Jim. So, the markets may be a little disappointed that he doesn't give them a hint, but they're not in a position to give any kind of true guidance.
Jim Puplava:
What about a situation, Jim, where you see a slowing economy, rising unemployment, but inflation is also rising, so we get into stagflation. What kind of position would that put the Fed in?
Jim Welsh:
Well, again, it's a tough position, but I think their sensitivity and bias, Jim, is going to always be on the side of watching the unemployment rate more than the inflation rate. Now, the caveat is if inflation ticks up to 4% or just a little bit over, that's a manageable relationship with unemployment. But if, all of a sudden, for whatever reason, inflation started to tick up to 5% or higher, then the Fed is in a really hard place. Ultimately, I think they will always put more weight on containing unemployment. But, you know, that's why what they're doing is kind of tricky at this point in time because they're dependent on waiting for the data. And the reality is, and I think most people maybe don't fully appreciate it, for small business owners, the last thing you want to do is let go of an experienced worker, because it's hard to replace experienced workers who are good workers. And so, the jobs numbers are always in every business cycle a lagging indicator because employers are going to be loath to let people go. So, they're very uncertain. There was a CEO survey that I have in the May Macro Tides, and if somebody wants to receive it, send me an email: Jim Welsh, Macro Gmail, and I'll send it to you. But what it showed, Jim, is that in January, CEOs were looking to increase hiring, about 60% of them. They were looking to increase capital spending and investment, about 60%. But by April, those numbers had almost been cut in half. So, you have this huge uncertainty wave that's kind of gripping everybody. And that is also a negative, obviously, for the economy, because as people keep their hands in their pockets, they're not spending. That's one of the reasons why the economy is going to slow in coming months. But until we really see clarity regarding all this stuff, you know, I think that uncertainty keeps people waiting on the sidelines. But again, just that waiting alone means some hiring isn't taking place, capital spending and investment isn't taking place. And so, to me, that's one of the big negatives. And for consumers, they're in the same boat. You know, now we did see people rush to beat the tariff clock, if you will, by buying cars and buying some other things, which is why the trade deficit exploded in the first quarter. But, you know, those purchases pull demand from the future. So, you think, you know, I was thinking about getting a car this year. Yeah, I better get it now. But that means you're not going to buy it in June or July, where you maybe were leaning toward. So, there's a lot of distortions going on because of the tariffs, the prospect of tariffs, then they're going to hit. It caused activity to pick up in terms of activity of buying things ahead of the tariffs. But I think, Jim, in the second quarter, that's going to weaken. Now, the GDP numbers are getting, you know, really noisy, and I think it's going to be confusing for most people. The economy did not contract by 0.3% in the first quarter, but the headlines showed that. So, again, that's another reason why people are cautious.
Jim Puplava:
You know, presidents typically try to get the most difficult things that they need to get done in their first year of office, because year two, you're looking at congressional elections. In my opinion, Jim, he's got about a year to make this work or figure this thing out, because next year is the congressional elections. And, you know, Democrats vow, you know, they hope to take Congress, and if they do, they're going to impeach the president. And I can't help but think that some of his advisors are telling him, hey, we got to get this done within the first year, because next year everything is going to be focused on the midterms.
Jim Welsh:
You're 100% right, Jim. And I agree entirely that it's a really short fuse that they're working with or shot clock. I think that's why we've seen so many executive orders. I think it's like four or five times in the first hundred days what President Trump did in his first term. I think they're pushing the envelope on a lot of issues because they know they're going to wind up in courts, and that will take time. And they're trying to get things, you know, let's get the clock running in terms of decisions on various issues that have to go through the courts. But you're 100% right. They have a plurality of about five seats, which is razor-thin. A lot of people voted for President Trump for the first time in their life voting Republican because they thought he would make the economy be as good as it was back in 2018. Inflation was lower, the cost of living was lower. And you know, that's just not going to happen. And so, there's a real risk, to your point, that if things aren't on the mend and on the upswing come the midterms, it'll be very easy for the Democrats to control the House. I don't know about the impeachment, but they can basically shut down all of his legislative attempts to change the economy and the way he functions, regular, you know, the regulatory environment, and so forth. So, his primary domestic agenda could be just shut down if the Democrats retake the House. So, you're 100% right. And I think that is why we've seen things happen at breakneck speed, because the clock is running. And I think President Trump, as well as the people in his staff and Cabinet, they know that full well as well.
Jim Puplava:
So, we talk about him having about a year to get things done. I'm looking at a different macro environment as we go forward. As we mentioned, interest rates are higher, oil prices are higher, the deficit is bigger, interest on the debt is skyrocketing. And the real risk here, Jim, is if we get into a recession, instead of a $2 trillion deficit, we could be running a $3 trillion deficit. On top of that, we've got about 10 trillion worth of debt that's going to be rolling over this year and next, added to the deficit. So, that's a lot the Treasury is going to have to finance here over the next 12 months.
Jim Welsh:
Absolutely. I think Treasury Secretary Bessent really has his finger on the pulse of everything you just described. And I believe the thought process within the White House is we need to move quickly because we're running out of time. As far as the debt, 36, 37 trillion, interest expense above a trillion dollars, we're spending more on interest expense than defense. So, I think they really believe that unless we can control and get the budget deficit from over 6% the last two years. And again, I don't know that people fully appreciate, Jim, we've never had a 6% plus deficit with the economy growing at 2.5% in our history, ever. So, clearly, a lot of spending has been done that needs to be reined in. Treasury Secretary Bessent has said he wants to cut the deficit from 6 to 3%, but that's one of the things that's going to slow the economy in the first quarter. One of the subtractions, not only was trade at 3.8 points, but government spending subtracted 0.25%. Well, if they achieve their goal, Jim, we're going to see the drag from less government spending have an even greater impact on the economy. But if you're taking the long-term view to all the points that you made, we need to take constructive steps to address those long-term issues that are really only probably three to five years out there. So, it's not that long-term, but what it means in the short term is potentially experiencing the economy slowing, maybe slipping into a recession. And I think it's, you know, just preeminent on President Trump doing a better job and members of his Cabinet explaining some of these long-term risks. You know, people, if they have an understanding of why things are tough for a little while, if they have an idea of why they're doing it and they buy into that, they're willing to tolerate it. So, this gets back to the prior point you made about the midterm elections. If they don't do a great job of explaining that the economy's slowing, but it's going to give us a big payoff, that just increases the odds that they will do poorly in the midterm elections. So, I think there's a lot at stake, and it's a huge tall order to accomplish what they're trying to do. And unfortunately, most people in this country can graduate from college and know literally nothing about how the economy functions. And therefore, you know, they hear somebody, a politician, say this or that, and they have no capacity to know whether or not that statement is lying or misinformation. And there's a lot of that going around. So, it's a really critical time. And I'm skeptical, quite honestly, I'm hopeful, but I'm skeptical that they're going to be able to pull this off.
Jim Puplava:
You know, it's rather interesting, and I want to talk about where these markets and where the sectors are going to go over the next couple of years. If we take a look at when you and I got in this business, Jim, energy was 25% of the S&P, industrials, materials were about 15% apiece. So, hard assets were roughly 50% of the market cap of the S&P. Fast forward to where we are today. Tech's 30%. I think energy is like 3 or 4%. And if you move into an inflationary environment, which I think we're moving into, it seems to me we're going to see a rotation of sectors of what worked over, let's say, the last 10 years of disinflation compared to what we're going to be facing with inflation.
Jim Welsh:
I think you're right, Jim. You know, the risk and challenge is if there is a slowdown and/or a recession, you know, what will happen is tech stocks will get hit much harder than some of the economically sensitive stocks like energy, industrials. But they will also maybe suffer, you know, some consequences because of the economy. That's what happened back in 2002. While tech stocks got slaughtered, those other sectors were down, but very, very modestly. And then they were the first sectors to lead the way out of that bear market. So, I think you know where you're headed and what you're talking about makes a lot of sense to me.
Jim Puplava:
Yeah, because you can just take a look, and I think people forget about this with the influence of indexing and passive investing. And going back to 2022, a lot of these MAG7 stocks were down 40, 50, 60%. If you look at where some of these stocks are now, the markets may be down single digits or maybe double digits, depending if you're looking at the NASDAQ. But a lot of these stocks, Jim, are down 20 and 30%.
Jim Welsh:
Yeah, yeah. No, I mean, there's clearly... I mean, last July, I was warning about the semiconductor stocks. I was drawing a parallel to RCA back in the 1920s when they came out with radios, and everybody went crazy. RCA stock went from 8 bucks in 1921 to 560 in '29, and by '32 was selling at 15 bucks. What ultimately happened is NBC, RCA, you know, did in fact establish radio stations all over the country. So, they fulfilled all the hopes and dreams that people had. It's just they were mispriced. And I think the same thing is happening, is unfolding right now in terms of money starting to flow out of those stocks. And as that happens, I think you alluded to this, passive investors don't fully appreciate, yeah, I'm going to put my money in an S&P fund, it's only three basis points. But if technology is weighted at 30%, and they drop by 30 to 40 to 50%, which I think is going to happen in the next bear market, those index funds, those passive investors are going to really take it on the chin relative to doing a little bit more digging and identifying industrials, energy stocks, and so forth, some of which pay some pretty decent dividends. So, I think you're ahead of the curve, Jim, in terms of your thinking and what you're doing, and I think you'll be rewarded for it.
Jim Puplava:
Well, Jim, given the fact that you think the S&P maybe can get up to 5750, and this corrective period is going to last a lot longer than most people anticipate, what would you be doing here given where the market is positioned today?
Jim Welsh:
Well, I think next week is a time to lighten up on the S&P. I think the technology stocks that have had a pretty good move, I think it's just going to be time to raise some cash. I was pretty negative as we got into February. You and I talked. I discussed the advance-decline line, the divergences that it was kind of warning the market was vulnerable to at least a 7 to 10% correction. I thought President Trump was serious about the tariffs. Wall Street didn't think he was. They thought, wow, he's just going to get a few concessions and roll over. And I thought investors then would have a reason to sell. And, you know, the S&P quickly lost 20%. I think he's in it for the longer term, as for all the reasons we just talked about, Jim. So, yeah, I think there's another leg down coming. I think we're, in all likelihood, in a bear market, and as a result, preservation of capital in that kind of environment makes sense, and that's the way I would approach it.
Jim Puplava:
All right, well, listen, Jim, as we close, if our listeners would like to follow your work and find out more about Macro Tides, your newsletter, how could they do so?
Jim Welsh:
Macrotides.com, or send me an email: Jim Welsh, Macro Gmail. I'm happy to send out the May Macro Tides issue, which kind of covered a lot of the stuff we talked about, but in greater detail.
Jim Puplava:
All right, well, listen, as always, Jim, pleasure speaking with you. Have a great weekend.
Jim Welsh:
You too, Jim. Thanks so much.
Here is the corrected transcript with spelling, grammar, and punctuation errors fixed, while keeping it as close to the original as possible. Speaker labels are bolded as requested.
Jim Puplava:
Well, we've seen some recent pullback in oil prices. Prices are dropping at the pump, except in California. Where are we going with oil? Will oil come down as the President wants, or could we be facing higher oil prices? Let's find out. Joining us on the program is Robert Rapier. Robert, you wrote an article, "California Gas Prices Driven by Policy, Not Profiteering." It was just announced, I think Phillips is pulling out of Los Angeles. They're closing a refinery. And then I think it's Valero that's closing their San Francisco refinery. So, we're losing more refineries, and we're paying what, a buck and a half over what the country's paying, right?
Robert Rapier:
And you know, there was an important new study that came out, and I want to emphasize this guy is not paid by the oil industry. He's not funded by the oil industry. It's a professor at the University of Southern California, and he did a pretty substantial report on what drives prices in California, and he just laid it out. You know, there were several factors, and it's basically California law. It's the special blend that you have, it's the high taxes and fees, and so forth. All of those things are what make the gasoline there so expensive. And one thing he found was no price gouging. There's no gouging going on. It's just market reactions to California's very stringent regulations.
Jim Puplava:
Yeah, because California gets a lot of its oil from Saudi Arabia. I want to move on. We saw a nice run-up in oil after the elections, but since the beginning of the year, it's been heading down. Although, Robert, in the first quarter, oil stocks have had one of their best performances.
Robert Rapier:
They did, but they've given that up in April since. And there was a Wall Street Journal article today that talked about the beating that the oil companies had taken since the tariffs were put in place. I actually had an interview yesterday where somebody said, well, I bet the oil companies are glad to see Trump back in there. And I said, well, keep in mind they profit when prices are high. So, if you think Biden drives gas prices higher, oil prices higher, well, oil companies like that. So, they do like the lower regulations under Trump. They like having more places to drill. But they made a lot of money under Biden because of higher oil prices. And the first quarter this year, things were pretty good. They were the top-performing sector in the first quarter. But when those tariffs went into place, they've just gotten battered. I think Chevron shed like 20% in April, something like that. And that is a good-quality company right there. That's, you know, getting taken a major hit over these tariffs. And why are the tariffs impacting them? Because that increases the chance of a recession. And when you have a recession, oil demand goes down. So, oil prices are coming down for the wrong reason.
Jim Puplava:
That was one of his goals. He wants to bring it down. But I don't think any oil company, when you start getting prices below $60 a barrel, as they got last week, that they're going to be drilling and adding new drills to produce more oil. I mean, if it's at $60, why would they want to drive it to 40?
Robert Rapier:
That's exactly right. I think Trump has mutually exclusive goals here: higher oil production and lower oil prices, and those things just pull in opposite directions. So, for consumers, I've seen consumers talking about, you know, how gas prices are falling, but for oil companies, you know, this is not good. And we're no longer living in 2005 when we imported 12 and a half million barrels a day. We're exporting. So, when oil prices fall, it actually hurts our trade balance. So, the very thing the tariffs are supposedly going to fix, we're hurting that when oil prices fall.
Jim Puplava:
Well, hopefully, this thing's going to be sorted out by summer, because I read a statistic like 65% of the ships from China are just sitting in port. They're not coming here. And if something doesn't change, we're going to start seeing goods disappearing off the shelves by summer.
Robert Rapier:
Yeah. In fact, I went to get gas yesterday for my wife's car, and the two stations close to my house, one had no gas at all, and the second had only regular unleaded. The premium and the two higher grades were completely gone. And there was a sign there that said, we're dealing with supply chain issues, and we can't get this in. And I went in the store, and I got a... there's a cheese that I really like in there. And the guy said, we can't get the cheese anymore because of the tariffs. Now, when that starts biting with people, they're going to be very upset, and they're going to start, you know, making some noise. I don't think this is tenable. I think something has to change. And I think, you know, I agree with you. I think by summer, a lot of people are going to be feeling some pain, and there's going to be a lot of pressure to roll this back.
Jim Puplava:
Well, the other thing, too, we just had a negative print on GDP. A lot of that had to do with excess imports into this country ahead of the tariffs, and imports subtract from GDP. But I don't think what the President wants to see is a negative quarter followed by another negative quarter. Then we could be heading into a recession, which would not bode well.
Robert Rapier:
Right. And I would think we're probably going to see negative GDP this quarter because this is the quarter... Remember, the tariffs didn't go into place until April 2nd. I mean, that's when they were announced. So, the whole first quarter, that GDP contraction in the first quarter was just people anticipating the tariffs, people getting concerned and slowing spending and, you know, trying to prepare for the tariffs. Now, in the second quarter, you're going to see the full impact of tariffs. And I think that is going to, you know, if I had to bet, I would bet we contract GDP this quarter.
Jim Puplava:
You know, in my opinion, Robert, he's got about one year to try to fix and get this thing done, because 2026 starts the midterm elections, and if we're in a recession, the stock market's down, prices are going up, that's not good for the President.
Robert Rapier:
That's absolutely true. And I hope... I don't like these tariffs. I didn't want to see them in there. Almost every economist will say this is bad for trade. And Peter Navarro apparently has been in Trump's ear for a long time, saying tariffs are the key to prosperity. So, the market has voted. You can see what the market sell-off... you know, they think about the tariffs. I've seen many studies that say tariffs do decrease trade. They're not good for overall prosperity. Goods cost people more. It's like a stealth tax on everyone. So, you know, I do hope this gets abandoned, because I don't... you know, it would be one thing if we had really high unemployment, and we were trying to bring jobs back here because, you know, our unemployment levels are high, and we've lost all our employment overseas. That's not the case. We have low unemployment. And so, you're putting tariffs in a situation where things were going pretty well. I mean, after that big inflation hump from COVID that happened in every country in the world, I mean, it didn't just happen in the United States. It happened everywhere. You know, we recovered in the US faster than any other country, and so things were on a pretty good pace. And then came in here and threw these tariffs in the mix. And that really caused some chaos in the market.
Jim Puplava:
Well, let's talk about something that's doing really well. And let's talk about natural gas. You know, Robert, we're seeing all these data centers that are going up, and the grid can't handle all this extra demand. So, a lot of these companies, whether it's Microsoft, Amazon, have been going directly to energy companies and cutting deals, like Microsoft did with the utility company. And even I think it's Chevron is building natural gas plants, and they're saying, we'll build the plants for you for your data center. And I'm thinking of the one that Meta is putting in in Louisiana, where they just bought, I think, 2,500 acres for this center, and two natural gas plants or three natural gas plants are going to go in to power it. So, let's talk about natural gas here and the possibility that we may be exporting more to Europe.
Robert Rapier:
Right. And so, those are the two big drivers right now for natural gas. We are still increasing production. So, production is increasing, but demand from both LNG and from the data centers, which I just don't see any end in sight for this. I talk to utilities, and they say we can barely keep up with demand. Utilities are investing a lot of money in being able to meet the needs. And so, all of this has provided a nice uplift for natural gas. So, I was reading the reports on a couple of companies, Enterprise Products Partners, and they were talking about their natural gas business doing quite well. And their oil business, not as well in the first quarter, just because prices for natural gas were a lot higher, and prices for oil are declining. So, you know, companies that are really heavy in natural gas, they should do well. Those that are heavy in oil, they're probably going to take a hit. You know, I'm looking at Chevron again because Chevron is one of my favorite companies. I mean, they're my favorite integrated supermajor. The price has fallen to the lowest level in three years. I mean, you can buy Chevron now for what you could buy it for in early 2022. That's a bargain. You know, Chevron has gotten hit hard because of the tariffs and stuff, but I just can't believe that this is going to be a sustainable situation. I mean, you've got a chance to pick up Chevron on sale right now, and I'd definitely be looking at a company like that, Robert.
Jim Puplava:
What are we going to do? I mean, you know, this whole ESG movement has discouraged companies from exploring for oil, increasing production. In fact, you've seen it in Europe, where they mandated, whether it was Royal Dutch or British Petroleum, to start divesting themselves. The problem is oil is a depleting asset. So, as oil companies push out more oil out the front door, you know, what's going to be coming in the back door to replace that? And do we run into an energy problem a couple of years down the road here?
Robert Rapier:
Right. So, that's probably my biggest criticism of the Biden administration. You cannot mandate technological breakthroughs. You cannot mandate when, you know, people are going to be ready to give up their gasoline cars for electric vehicles. And that's what California is trying to do. And that is part of the problem in California. That's why gasoline prices are so high there right now. They've tried to mandate these changes, and if the supply is not there to meet the mandated demand, we suddenly have a problem. That's why I was so in favor of the Keystone Pipeline expansion that got, you know, canceled over and over again because you had a private company there willing to invest money to provide supplies from Canada. And if 10 years from now we don't need that pipeline, well, that's the company's risk. They took the risk, and it didn't pay off. But if we do need it, okay, it's there. The pipeline is there. And it didn't cost the government anything. I mean, this was silly to me that we wouldn't just want to build that pipeline and, you know, have that there for supply security, because you just don't know, you know, when the time comes, you're going to need that. And if the pipeline is not there, okay, well, now we have to ask Saudi Arabia to send us more oil.
Jim Puplava:
One of the problems, I guess, whether it's oil companies or other businesses, every time we get a new administration, policy changes. Obviously, Biden was very big on a green transition, moving away from fossil fuels. My own state of California is trying to do that, and it has turned out to be a disaster. But it makes it very difficult for an oil company to plan. So, why would you go out and spend billions and billions of dollars exploring for oil when, let's say, the next president comes in, and they're going to make it more difficult for you to earn a profit on that? I forget, was it 650,000 acres in the Gulf of Mexico that was taken off from drilling? So, you know, if you're going to go out and start a project to bring in an oil platform and start drilling in the Gulf, and then a president comes in and changes the law with executive orders and says, you can't do that, how do you plan?
Robert Rapier:
Right. Having worked for oil companies, that is the biggest frustration, is that projects may take 10 years to do. And you may see three different presidents across those 10 years with three different ideas of the way things should go. I can tell you when I worked for ConocoPhillips, Sarah Palin was governor of Alaska. We had the same problem with her. We could not get Alaska to commit to a long-term tax rate so we could plan this project. They couldn't do that. They said, well, you know, oil prices are higher, we may want to revisit this. And it is so hard then because you don't know what your economics look like. And we didn't do a project because of that, because we couldn't pin them down to a tax rate for, you know, written in stone for the next 20 years, which we need to pay out the infrastructure for this project. And, you know, California, I've heard the oil companies push back with California and the refiners say, why do you expect us to invest money that's going to take 30 years to recoup when you're trying to legislate us out of business? How does that make sense?
Jim Puplava:
Yeah, because I think it's 2035, you're not going to be able to sell gasoline cars in California. You're not going to have a gasoline lawnmower, you're not going to have a gasoline leaf blower. So, a lot of these things make it very difficult. But, you know, the one good thing, you know, the one thing I really like about some of these integrated oil companies, even during when oil prices actually got negative during COVID, I think they got, what was it, a negative 30 or $40 print on oil. But if you take a look at a lot of these oil companies, I don't care if you're looking at Chevron, you're looking at Exxon, all of these companies have maintained their dividends. And, you know, when you take a look at these pullbacks that we've seen, the low P/E multiples on these companies, increasing dividends, and dividend yields that are competitive with treasuries, to me, this sounds like an opportunity.
Robert Rapier:
Right. So, Chevron earned a lot of points with me in 2020 when prices went down, and their CEO went on CNBC, and he said protecting the dividend is our utmost priority. And they did. They never cut the dividend. Shell did. Shell cut their dividend. They hadn't cut their dividend since World War II. But when COVID hit, Shell cut their dividend. So, they lost some credibility there. But Chevron didn't cut; they managed through COVID, and they continued to increase their dividend. That's why I say they're my favorite integrated supermajor, Chevron. And, you know, when you've got a chance to pick them up at a discount like now, in the long run, that's always proven to be a good deal. If you look at the chart, you know, every major pullback, they eventually run back up again. So, you know, I'd be picking up Chevron here for sure.
Jim Puplava:
Yeah. And they're also going to be buying back 22% of their stock.
Robert Rapier:
I mean, Chevron is a very well-managed company. I mean, I can't say enough good things about them. You know, Exxon has always been the big kid on the block, but I always thought Chevron was... Chevron avoided some of the bad decisions that Exxon made over the last 20 years. You know, Exxon, you know, bought a big natural gas company just before prices collapsed, and Chevron managed to avoid any of those big, big issues. And, you know, they've outperformed ExxonMobil in the last 20 years.
Jim Puplava:
Well, I think Warren Buffett now owns 8% of it.
Robert Rapier:
I don't know. I knew he had bought into Occidental, and that has paid off.
Jim Puplava:
His second-largest oil holding is Chevron. Robert, what about, you follow the utility sector, and most people, you know, have always thought of utilities as widows and orphans stocks. But you take a look at some of these utilities, like Florida's utility, some of the utilities in Virginia where a lot of these data centers and internet is based, they're actually becoming growth stocks again.
Robert Rapier:
Oh, I mean, I think a lot of people don't know, and I've said this quite a few times, that in the S&P 500, some of the top-performing companies at one point, three of the top 12 over the past year performers in the S&P 500 were utilities. And one of those is NRG Energy. We got NRG in the Utility Forecaster portfolio at Investing Daily, and it's returned 200% for us. Before the recent pullback, it was up 110% year over year. So, it's done very, very well for us. Constellation, Vistra, there are several. And the reason these are a little bit different than most utilities, they sell competitive power, so they're not regulated utilities. They're able to go out there and sell to the highest bidder. You know, they do have regulated segments, but they're able to take advantage of these price surges and, you know, give power to the data centers that need it at a competitive price. So, that's why they're growth stocks. That's why they're performing like growth stocks. You still get dividends. I see NRG's is down to one and a half percent. So, that's pretty low for a utility. But, you know, you're getting a lot of growth there with that.
Jim Puplava:
And there's quite a few of these companies now that are operating in unregulated businesses. And that's why you're seeing, we own one that, you know, they're increasing their dividends 9% a year. They're a growth utility. I want to talk about nuclear because there was hope that nuclear would be an answer, and I think it is down the road for energy. But what about, let's say, modular nukes? I think, Robert, with the way things move so slowly here, it's going to be three to five years before we see that.
Robert Rapier:
I think so too. I mean, nuclear, a lot of regulations in nuclear, things move slowly. There, you know, from an engineering perspective, just looking at it, you go, well, this is the solution to our problems right here. This is a solution to our energy problems. If we don't want high carbon-emitting energy sources, nuclear is the way to go. We should have as much nuclear as we can possibly build, as long as we can ensure the safety and assure people we're not going to have meltdowns and cause you'd have to evacuate your home permanently on a moment's notice. But yeah, you're right. Nuclear is a very good answer. Engineers love nuclear. People are still afraid of nuclear, I think, in general, and that's why it moves slowly. I mean, you get a lot of opposition when somebody wants to build a nuclear plant. The small modular reactors, there's more, you know, probably more potential there to get some of these in, especially for the data centers. But, you know, I agree with you, it's not going to happen this year or next year.
Jim Puplava:
You know, it's amazing because we've been using modular nukes on aircraft carriers and nuclear submarines. We've been doing that for over half a century, and we've never had a problem.
Robert Rapier:
Yeah, but now you're going to put it in somebody's neighborhood, and now you have to deal with that.
Jim Puplava:
So, I think at our peak, we had 112 plants. I think we're down to 92. And with decommissioning, we'll probably be down to 90 here pretty soon. My own state, we decommissioned one of the nuclear reactors. They postponed decommissioning the one at Diablo Canyon up in Northern California, but that goes out of commission in 2030. So, I don't know what California is going to do because we're relying on excess power from nuclear power from Arizona. But Robert, they've got three major plants. You've got Taiwan Semiconductor, Apple, and Intel. And once those plants go into operation, I don't know if it's next year or the year after, depending on whether they can get the workers, bye-bye excess power to California.
Robert Rapier:
Yeah, you're probably right. And I mean, California, they think they're very forward-thinking, and they, you know, they're looking at, you know, yeah, we want to be all green, but I just look at what's happening with the refining. You look at the unintended consequences. Unintended consequences are soaring energy prices and volatile energy prices. And how does California respond? They blame the oil companies. They say these guys are taking advantage, they're price gouging, they don't take responsibility. I have a lot more respect for the governor of California if he'd say, yes, this is self-inflicted, we did this, but it's the price we have to pay to move forward and to transition. That's just the price we have to pay instead of hiding behind, you know, the oil companies did this to you. That's just, that's infuriating to me.
Jim Puplava:
Well, I think there, I don't know if it's passed, but they're going to put in a bill where you could sue the oil companies for climate change in the California LA fire. So, I mean, it just gets crazy here, Robert. Given where oil prices are right now, if you were looking down the road, given the fact that we're not investing, we're not exploring like we used to, I mean, most companies right now are paying dividends, buying back their stock, and, as you say, why am I going to go out and make all these major investments if, you know, in 2028 we get a new president, and they change policy?
Robert Rapier:
Right. And so, yeah, what's going to happen with oil for the rest of this year? If we do go into a recession, and you know, the economists and the banks are increasing the odds that we'll be in a recession, oil prices are going to be pretty low for the rest of the year. They're not going to, there's not going to be much to push prices higher. But you're going to see a point where global demand is growing, and supply is probably stagnating a little bit. And so, you know, the saying is the solution to low prices is low prices, and vice versa. Prices are low long enough, you know, supply fails to keep up with demand, and then suddenly you've got a shortage. I mean, that's why oil prices are so volatile. You know, demand and supply get out of whack, and then suddenly you can't fix that quickly. And so, you know, you experience a period of volatility. The most famous one was the early part of the 2000s, where, you know, Saudi was very slow to increase production, and Chinese demand was increasing rapidly. And we saw oil hit nearly $150 a barrel in 2008. And that was just the oil industry not reacting fast enough to a situation.
Jim Puplava:
Well, I'm just looking at the growing demand. You know, we think of maybe an economy in recession here, but if you look elsewhere where demand has really grown, it's in the emerging markets, it's in China, it's in Asia, it's in Latin America, where demand is growing. And I think people forget that each year the demand for the stuff keeps going up. It isn't going down because I know the IEA was putting out some information, they thought that demand would peak. I don't see that happening anytime soon.
Robert Rapier:
Yeah, no, I agree. I mean, we may plateau a little bit, but I don't see any major decline. Bloomberg predicted that in 2015. Famously, they said by 2022, electric vehicles will have taken a 2-million-barrel-a-day bite out of oil demand, and oil demand will never recover. And I made fun of them at Forbes for that. And I noted in 2022 how much higher oil production was than it had been in 2015, so just the opposite of what they thought it was going to be.
Jim Puplava:
So, given where you see right now, with this pullback that we've had, as you mentioned, the energy sector was one of the best-performing sectors in the first quarter. They've given that back. Would you be buying here?
Robert Rapier:
I would be buying certain companies. I'd be buying, you know, again, Chevron is the one, to me, that they weathered the storms better than anyone. I was looking at comparing the crash in 2020 with now. And one group that got hit hard in 2020 that hasn't gotten hit hard right now is the pipeline companies, Enterprise Products Partners. I think the best master limited partnership pipeline company, they got hit hard in 2020, and they haven't taken much of a hit at all in the current downturn. So, you know, they're not as much of a bargain, I'd say, as, you know, Chevron. I just looked. Chevron is down 20% over the last month. That's amazing that a company that big would take that much of a hit. Now, the pipeline companies have been down. I mean, Enterprise Products Partners is down about 12% in the last month. So, that's not nothing. You know, it had risen a lot. It's still, over the past year, it's still up nearly 10%. But the oil producers, that's a little bit of a riskier bet right there. You know, at least with Chevron, you've got some hedging between upstream and downstream. And with the oil producers, that's a little bit riskier business. And I don't know that I'd be going out and buying oil producers. But pipeline companies, if you're an income investor, pipeline companies here have had a little bit of a pullback. You know, Chevron, Shell. I like Shell, even though they cut their dividend in 2020. You know, it's in our portfolio at Investing Daily, and it has done pretty well for us until this downturn.
Jim Puplava:
Well, the nice thing about the oil companies, and even, you know, I like the integrated oil companies because when prices do come down, the inputs to the refineries cost less. So, they're diversified. So, you're not just in exploration. Robert, as we close, if our listeners want to follow your work, I know you're a prolific writer. You write what, Investing Daily, and you're on Forbes, and you also have a newsletter. Tell our listeners about it.
Robert Rapier:
Yeah, sure. So, mainly I tell people, find me in three places. I'm on Forbes, where I write at least five articles a month on the energy sector. So, about one a week, I'll have something on the energy sector. I'm the editor-in-chief of Shale Magazine, and we cover the whole energy space, but there's a focus on shale production, especially in Texas. We're on the radio in Texas. We have a radio show there. And then Investing Daily. I write several investment newsletters for Investing Daily. I write Utility Forecaster, which doesn't just cover utilities; we're an income newsletter. So, we're covering utilities, telecoms, consumer staples, energy companies. I mean, we're basically any company or any sector that pays a decent dividend. And then I've got a covered call newsletter too there as well, covered call, cash-covered put. So, showing people how to use options very conservatively to boost their yields. So, we're not really trading options. We're hedging our stocks with options.
Jim Puplava:
Well, listen, Robert, as always, it's a pleasure having you on the program. You take care, my friend.
Robert Rapier:
You bet. Thanks a lot.
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