Yellen, Inflation, and the Gas Price Blame Game

Janet Yellen admitted to being wrong about inflation. I was wrong too, but for an entirely different reason. Plus, thoughts on energy costs and how it all relates.

In a rare instance of establishment accountability, Treasury Secretary Janet Yellen has done the unthinkable; she admitted she was wrong. In a CNN appearance yesterday with Wolf Blitzer, Yellen was shown a video montage of herself incorrectly dismissing inflation as a serious problem from March and May of last year. You can watch the video here. Short of that, this is the money quote:

I think I was wrong then about the path inflation would take. As I mentioned, there have been unanticipated and large shocks to the economy that have boosted energy and food prices and supply bottlenecks that have affected our economy badly that I didn’t — at the time didn’t fully understand. But we recognize that now.

Yellen

Bolded text in that quote is my emphasis. It would be easy to take a victory lap here. It would be easy to point the finger and say, “see, these people are idiots.” But I’m not going to do that… yet. I’m giving a quick tip of the cap to Janet Yellen for admitting she was wrong. It’s refreshing to see someone in a position of power like her who is actually willing to do it. I do wonder what her commentary would have been had she not been shown the “gotcha” video right before. But that doesn’t really matter.

At the time didn’t fully understand.

That’s a remarkable admission and it’s a bigger nugget than “I think I was wrong.” Janet Yellen was the Federal Reserve chair for 4 years. She’s now the Treasury Secretary of the United States. She has degrees from Brown and Yale. She was faculty at Harvard and at the London School of Economics. I’d imagine there are few people on this planet who should have a better understanding of inflation and basic economics than she should. So my question is how come a random guy in Ohio with a communications degree seemingly had a better handle on inflation last year than she did?

What I Was Saying a Year Ago

You can check the receipts. On May 8th, 2021 I said this in Price Inflation is Already Here:

Back when this pandemic started, I knew consumer price inflation would eventually get out of control. I'm a lunatic so I've been keeping Costco receipts along the way and doing the kinds of things that angry old men do.

In that post, I used the year over year rate of change in my cigar prices to argue that inflation at the time was probably closer to 8% when the official number was just over 4%. My rationale was cigars have two real cost inputs aside from time; labor and materials. Materials are really just tobacco leaves. Because so many cigars that are shipped to major retailers like CI are bundled and lack traditional wooden box packaging, if cigar prices are moving up quickly, it’s probably a sign price inflation is getting bad.

Later that month, I wrote How Can You Not Buy This Chart. In that post, I shared the chart for Invesco’s commodity fund (DBC). At the time, DBC was $18.66 and had just broken a multi-year horizontal resistance and a decade-long diagonal trendline. It closed yesterday at $28.80. That’s a year over year move of 54% to the upside. Short of buying the oil ETF (USO), it has been the inflation play of the last year and that position is the biggest reason why my portfolio hasn’t been a complete train wreck despite exposure to Nasdaq stocks like Roku.

DBC has done better than broad equities, Gold, and Bitcoin. But not better than oil. Now here is my apology; I’m sorry for getting the input costs wrong on my cigar price article. Energy is the critical input cost that I missed in May 2021. Everything is more expensive to move. This is having a direct impact on real tangible goods. It’s leading to higher shipping costs and higher material costs. We’re Naked Wines fans in the Faybomb house.

Side bar and shameless shill alert: Naked Wines is an awesome service and has pretty good wine for the price. FWIW, if you’re not already using it, here’s our referral link for $100 off your first order. For full disclosure, we’ll get a $40 bonus as well if you use the offer. It’s a great way to support this work if you don’t want to go for a paid subscription. Of course, you can do that too ;)

Anyway, Naked Wines upped their minimum order requirement for free shipping from $100 to $200 last month. Citing shipping costs as the biggest driver for that policy change. The company even shared this graphic to highlight the actual numbers they were fighting:

The energy cost increases are a large part of this. We can see it everywhere.

The Gas Price Blame Game

I am far from an energy expert, and I welcome any comments from readers who have a strong understanding of the industry. But just doing some simple research, I question most of the gas price arguments that we’ve seen made by politicians and pundits. Rather than admitting that our own policies just might be contributing to the price at the pump increases, we get fed lines like “Putin did it” or “blame the gas companies for price gouging.”

While the Russia/Ukraine war is almost certainly having an impact, there is no question the higher oil price trend started well before that conflict began. Price gouging? I’m not sure about that either. Both of those takes seem to be attempts at blame shifting. For instance, the price of WTI crude has been increasing faster than the national average at the pump on a year over year basis for all of 2022.

If anything, and to be clear I’m not arguing this, but one might be able to claim that gas prices could theoretically be even higher than they are now based on the increased costs to produce. I think we can get a good long term view of the health of the industry by looking to the super major integrated oil and gas companies.

The integrated outfits are a good barometer because they do business in every segment of the industry from discovery/production to distribution/refining then to retail. The two big American names are ExxonMobil and Chevron. What is their operating income trend over a sustained period of time?

While they’ve recovered nicely from operating at a loss last year, it turns out neither have seen their net income increase to levels that are drastically higher than they were in 2018. In the case of ExxonMobil, net income is still well off highs from a decade ago.

They Want This Though, Right?

It’s very difficult for me to accept that higher gas prices are a bug rather than a feature of our domestic energy policies. We are explicitly being told we need to shift to electric vehicles. I sometimes wonder if those who live in the ivory towers have been there so long that they truly can’t empathize with the commoners. High gas prices hurting? So sad. The response from the elite has essentially been, ‘get an EV, plebeian.” This is a response that is equally insulting as it is ridiculous from a current supply feasibility standpoint.

A group who definitely does understand the energy industry far better than I do is the team over at Doomberg. While they’ve officially taken all of their new content behind the paywall, there is a wealth of knowledge from their archive that is still entirely free to read. This is an excerpt from a March Doomberg piece titled A Serious Proposal on US Energy:

Whether it be the wars in Afghanistan, Iraq, Syria, or Yemen, Dennett argues persuasively that the real motivations of each centered on the need to secure and transport oil and natural gas.

It is clear from reading such work that the highest levels of the US government had, at least until quite recently, a deep appreciation for the direct connection between energy and economic power, so much so that irresistible ends justified all manner of unspeakable means.

While that entire Doomberg piece is worth your time, I’ve bolded some of that quote as my own emphasis. I believe those key points are incredibly important to understanding what might really happening beneath all the rhetoric. My read on this is it is probably not conspiracy theory to suggest that what is happening in energy is not an accident. Unspeakable means to justify irresistible ends are not the exception, they are the rule. Janet Yellen and the bureaucratic elite like her are not dumb. They’re just really bad at lying in an age where there is a recording of everything.

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The powers that be want you to feel this pain. They want you to hate buying gasoline. They want you to use a dying currency. They want you to beg for a new system. A system where the solutions magically take away your privacy. Where the solutions give them the ability to punish you for what they believe is poor behavior. Where the solutions require you to opt out of bodily autonomy. And finally, where the solutions won’t apply to them.