Europe Just Sent a Massive Warning to the World

Well, the ECB and other central banks, including maybe even the Fed, are very likely to overreact to oil prices by raising their benchmark policy rates. That possibility is no longer so straightforward. Even over there in Europe, where policymakers as a group tend to be more aggressively hawkish, several of them have come forward recently expressing serious and growing concerns about the demand side of the economy, especially where it comes to jobs and workers. And to that effect, fitting with that sentiment, two of the world's leading energy agencies just slashed their demand growth forecasts in a way we only see in periods like 2020 or 2009. Worldwide, the initial indications, especially where it comes to the labor market, are already beginning to look like the historic energy shock case. So much so, even central banks are starting to reassess what the real risk to the economy truly might be. Now, they still believe, by and large, it's about inflation. However, we're getting more and more indications on the other side, and they were greatly aided by the latest forecast from the U.S.'s Energy Information Administration, which just slashed its energy demand estimate to basically zero for this year. And its international counterpart, the International Energy Agency, it went even farther, saying it now believes global energy demand will outright shrink this year. Now, the last time that happened was 2020, and before that, 2009. So there is one critical factor in all this that most people overlook or just completely dismiss, including central bankers and certainly at the stock market. But that factor is really beginning to be way too much to ignore. That's the state of the global economy before the shock even began, and that is where the data and evidence is making a huge difference right now already. So while everybody is talking about inflation, rate hikes from central bankers, Steve, we've got a couple of, you know, a whole bunch of data points on Europe, but also oil demand that suggests this really is moving toward, to the point that, you know, even officials are talking about, but moving toward the historical energy shock case. Yeah, absolutely, Jeff, because, you know, we go back and let's take a look at Europe. I mean, there wasn't long ago that the manufacturing sector was deep in recessionary territory, you know, maybe even, you know, a financial crisis level, particularly in Germany. It was just like every month it got worse and worse. Companies were laying off. And then the government steps in and says, hey, we're going to do some, you know, military spending and everyone got excited, like, yes, this is what we needed. It's going to turn around. Then the oil shock hits and you get a lot of front running of demand, and we see that here in the U.S. state, all of a sudden, factory renaissance and see everything's going to be okay. It's booming, but there's this underlying problem. You don't see hiring, and what you're seeing is a pickup in hours in some cases, you're seeing some optimism, you know, some batteries saying, hey, maybe this will get better, but they're not reacting with the labor market. I think this is a problem Europe's facing right now, is they've laid off so many people, they know demand's going to come down because, you know, we talk about inflation, and yes, is this going to be inflationary? Of course. Are prices going to go up around the world? Yes. We're seeing it at the producer, the intermediate. We're seeing it at the consumer level. They're going to go higher. But Jeff, we talk about the right kind of inflation, demand led, and the wrong kind of inflation, energy led. And that's the problem here. Prices are going to go up, margins are going to get squeezed, consumers are going to pull back. We see this replay time and time again throughout history, and we know exactly what it means, is companies are going to have to lay off. They are eventually going to cut hours. And as you said, you start to sow the seeds of, it's pretty obvious where Europe's economy is headed. You know, we've seen this before. Four of the last five U.S. recessions, energy shocks, how Europe comes out of this even remotely unscathed, I have no idea, but it sure looks to me exactly where they're headed It is yet another recession, and of course, you know, the ECB is going to do what they always probably do, raise rates. Raise rates right out into this recession like they did in 2008, once and twice in 2011, just before that one started, too. It seems like a special talent. You must have to sign up for it, or you must have to demonstrate the talent to raise rates into a recession in order to get a top job at the ECB. Must be part of their requirements, job requirements. But I think that's a good point, right, Steve? It's employment, right? What we're seeing is these increasingly, lots of negative employment indications across Europe, which is, I mean, that's one thing that's going to get central bankers' attention. What they're going to say is, look, inflation, oil prices, we equate those two things together, therefore we need to hike rates. The only thing that convinces them that they're wrong is when unemployment starts to rise. And when unemployment rises, even before you get to higher energy costs, then you've got to say, oh boy, wait a minute. The economy was supposed to be picking up, as Steve said, late 2025 into early 2026. Everything was supposed to be already turning around, instead we see in European GDP, various employment numbers for particular countries, like I mentioned France, France is a big one. They've had negative payrolls for two years running. Unemployment rate is now 8.1% in France. Even across the entire Euro area, employment has slowed down to basically nothing. The year-over-year change in employment across the Euro area was half a percent, which is well within recession territory. So if you're an honest ECB official, you're sitting here thinking, wait a minute, employment, the entire labor market across Europe, but especially in the bigger economies like Germany and France, already weak and getting weaker before we get to the energy shock. We know how the energy shock plays out. We've seen it time and again, as Steve mentioned, energy shock and recession, you use those two things in the same sentence because they usually go together. So now all of a sudden, the ECB is starting to say, look, we've been talking about hiking rates, but now we have to maybe think about this a little bit more than we thought we'd have to think about it because we're already getting indications and sentiment and some hard data suggesting the recession, historical energy shock case is already playing out across Europe. I almost never do ads and I say no to the vast majority of those that are brought to my attention, but I was thrilled to be able to work with today's video sponsor, Monetary Metals. And the reason is because they're solving a big problem, one that I've been highlighting for a very long period of time. Gold is a safe haven, but other than sitting in a vault, it doesn't do anything. Monetary Metals fixes that. They let you earn real yield paid in physical gold without giving up ownership. It's not a fund. It's not a paper claim. It's your gold working for you. Every month, more gold gets deposited into your account. 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But if we're a central banker trying to convince the world that this makes a difference, they've got no margin for error. And this is why you hear central bankers all around the world when they speak. They seem a bit nervous because this is going to be one of those clear-cut times where they're going to do what they always do, cut rates, QE, or maybe they're going to magically come up with something new that they can do. And it's not going to work. And the problem is their credibility, which for you and I is already pretty low, but for the rest of the world remains relatively high. It's going to be absolutely destroyed here. Yeah, that's one thing you can do. You can look at the marketplace. You can look at bond curves and yield curves, but you can look at forward interest rate markets too, like Euribor Futures, which are the euro-denominated twin to Sofer Futures, which I covered a little bit, not that long ago. In Sofer Futures, you have the frown in the curve, which is the market expectation that some central bankers, including the Federal Reserve, might actually be able to raise rates in the near term, but eventually they're going to have to turn around and lower them again. That's the frown that the curve shape has taken. There is a frown in the Euribor Futures curve as well, which says the same exact thing. It's not exactly the same shape, but there's a frown there. What it says is that European central bankers are very likely to raise rates in the near term, but like everyone else around the rest of the world, at some point, we don't know when, they're going to turn around and drop rates again. Now, the term Euribor curve was already inverted before we got to the end of February. February 27, before the Iran conflict showed up, the Euribor Futures curve was inverted, same as the Sofer Futures curve, not as inverted as Sofer Futures, but it was inverted nonetheless, which suggested before the energy shock even began, like we're talking about here with employment numbers that are just coming in, participants in the marketplace realized the situation in the economy wasn't good. Even though the ECB, and this is a great point that you made, Steve, central bankers hate having low interest rates, especially if they have low interest rates facing economic weakness, because they want to be able to bring rates down from 5% to 1%. They want to say, look, we just cut rates by 400 basis points. This is massive stimulus. If you're already at 2% and you're facing economic weakness, what they believe is that they don't have enough altitude in their interest rates. What the market was saying before we got to March was that they didn't have nearly enough altitude and they were facing substantial weakness because the market was pricing rate cuts by the ECB from 2%, starting at 2%. Then you get the energy shock, and the market says, well, they're going to probably raise rates in the near term, but what ends up happening afterward? Will you throw in the higher energy costs, probably higher food costs, which we're already starting to see, and a whole bunch more of economic difficulties, businesses laying off workers, continuation in the deterioration in employment that we've seen already, where are rates going to end up going? They're not going to get all that high to begin with before they have to turn around. You've got the frown in the Arrival Futures Curve, which is the same as we've seen in the Silver Futures Curve, which is basically central bankers are likely to raise rates in the short run. However, they realize that there is a danger to employment and therefore the overall economy. The real issue here, the real question is, when do you see enough weakness, especially in employment, that central bankers have to say, well, maybe we can't hike rates? And what we're already saying here by some of these examples that we're getting is that some of these central bankers, especially in Europe, might already be at least in that same discussion. And you know, Jeff, that's almost a surprise there, thinking that, because again, as you said, historically, the ECB is like, oh, we'll just hike rates and then whoops. But let's talk about the curve in the short term. Why is it saying that rates are going to go higher? It's because of inflation, and we're seeing some signs that consumers are absorbing it, but we know they can't do that indefinitely. We know here in the US, of course, there's tax refund checks, they're drawing down savings. But when we looked at the recent retail sales report, where did we see the issues were? Energy and food. So the problem is for the average worker, for the average household, but not just here in the US, but all around the world, all their money's going to food and energy. And so what the curve is trying to say here very clearly is, yes, in the short term, are central bankers likely with some degree of probability to react to high interest rates or higher inflation? The answer is yes, because that's what they do. But what the curve is trying to say is, look, from an economic perspective, what happens after that is not because central bankers raise rates and it does something, what it's saying is consumers are going to get bogged down with inflation, because we talked about last week here in the US, average hourly earnings went negative due to inflation for the first time in four years. So as consumers spend more money on food and energy, which we can now virtually safely say there's no signs that that's coming down in the intermediate future, that means at some point they're going to have to cut their discretionary spending. As that backflows to the economy, we're going to see, of course, hours get cut, jobs lost, and that's what the curve, that frown, is trying to tell people is, hey, in the short term, yes, can we get higher rates? Will central bankers react to inflation? The probabilities say they might. But after that, it's the economic fundamentals of growth and inflation are going to start turning down, and the central bankers are going to have to play chase here. Yeah, that's the point, is that when do central, because they have the ability to influence short term rates, and wish they didn't have that ability, but they have that ability. So what you're really trying to figure out is, at what point do central bankers realize they made a mistake on the inflation side? Yes, there is consumer price rises in the short run, but it doesn't lead to what everybody imagines is inflation, which is a sustained advance and acceleration of broad prices, not just gasoline. But that's why they always use the term second order effects. So gasoline costs go up. And what they're worried about is that gasoline costs go up, and then all of these businesses in the economy that see their input costs rise, then have to adjust their prices. And then other businesses have to adjust their prices. And pretty soon before you know it, at least according to the theory, inflation is broad based and sustained. It's deeply entrenched. Expectations get unanchored and become something different. That's what central bankers are afraid of. They're afraid not necessarily of oil prices rising, but oil prices spilling over more broadly. What we're saying and what the market is saying is, that's not how this works. Because the economy is not experiencing, as Steve pointed out, it's not a demand side increase. It's not like incomes are rising and the job market is robust. Therefore, higher demand for all sorts of economic stuff is bringing demand for oil up. And therefore, there's more competition for what oil there's available. That's not what's going on. So you have higher oil prices for non-economic reasons, like we saw in 2022. And the only way the world can respond to it is not by passing further costs along to other customers and other businesses, which those other customers and other businesses can't afford it. So yes, you can try to pass higher energy costs along in places where goods are a necessity, but at the expense of basically everything else. So energy prices rise, and maybe there's a couple of second order effects. But the third order impact is for demand to fall everywhere else. And that's what these ECB officials are already talking about. Let me give you a couple of quotes here. First of all, Christine Lagarde at the last ECB meeting said, directionally, I know where we're heading, which means she's talking about we're going to hike rates. And I think that's the base case. I mean, Steve, you and I both expect that the ECB is going to hike. I mean, they can't. At this point, they're going to definitely do it. But however, we get Vice President Guindos, I think from Portugal, the impact on growth from the energy shock is going to become much more visible over the coming weeks. I noticed how, and that's the reason I flagged this, because he said coming weeks, not months. He said the growth impact, which means negative growth, going to become much more visible over the coming weeks. So that's classic energy shock case, but in the near term. Even some mainstream economists are starting to get cold feet on this, too. This was a senior economist at Societe Generale. We're already seeing some weakness in the economy, and that will damp inflation pressures and lower the risk of second round effects. And then he said policy tightening, which means rate hikes, it's not really tightening, but they call it that, should thus not yet be a done deal. So I go back to the beginning of this video. What I said was, we expect the ECB to hike rates. However, the possibility and the probability is starting to diminish. And the reason it's diminishing is because we're seeing more visible weakness in the economy, not straight up inflation leading into further inflation and the price spiral that everybody imagines. We're getting signs of economic weakness, the classic energy shock case, right now. And it's only May. We're only a couple months into this. That's not a good sign. No, it isn't, Jeff. Now, I've gone back and I've looked at some of these prior energy cycles where we've seen these spikes. And I kind of looked and said, how long do prices have to stay up before we hit some form of the point of no return? And in a weakening, a slowing economy, you're looking around two months. In a booming economy, it can last longer. But we're now past the two-month mark. And I think that's kind of what we're seeing from the ECB. Some of the members, they're getting uncertain. They're saying, look, we were hoping that this was going to be a transitory shock was going to come down. And maybe that inflation was going to push prices up, push producer prices, maybe get people spending. But just kind of what you want is people to start front-running demand. And then hopefully that seeps through to the economy. You get hiring. And then next thing you know, the thing kind of takes a life of its own. Now they're starting to realize this problem isn't going away anytime soon. The straight, not likely to reopen. And even if it did reopen tomorrow, by the time oil flow started really getting back out into the world, it's still going to take a long time for prices to come down. And the reality is they're waking up to the fact that consumers can't afford it. Businesses have no choice, but they can't pass it on. And the reality is, as you said, they're going to hike rates and then immediately turn around and be forced to cut them as the economy slams face-first into a recession. And that's what these oil agencies and administrations, the EIA and the IEA, that's what they just said too. They're basically saying the same thing you did, Steve, which is, look, we see where this is going and that's demand destruction. So take the supply part out of the equation right now. What is it going to look like on the demand side? And the U.S. Energy Information Administration said, we're looking at just 200,000 barrels a day growth for 2026, which is absolutely anemic. You never see energy growth at that limited level. Yeah, so 200,000 barrels a day down from 1.2 million. Now, 1.2 million wasn't great to begin with. This is worldwide, not just the United States. So 1.2 million growth, that was relatively weak and concerning, which is one reason why we were talking about a supply glut in the oil market before we got to the energy shock. So down to 200,000 barrels a day, which would be consistent with an economy, a global economy that's experiencing a legitimate, full-blown, synchronized recession. Now, the IEA went even farther. They were forecasting for 2026 1.3 million barrels a day. So similar to the EIA, the IEA was thinking 2026 would be relatively weak, but now they're thinking it'll be minus 420,000 barrels a day, which is something you only see in some of the worst cases for the world. That would be 2020 is an obvious one, but also 2008 and really 2009, more than 2008. Basically, globally synchronized recession. That's kind of what these agencies are forecasting for energy and oil demand growth. What they're saying is, regardless of supply, because prices are so high and because the economy is not booming and therefore can't really absorb the energy shock and the energy hit, we're looking at demand to really fall off sharply, which is a huge red flag because oil and energy overall, these are relatively price inelastic goods, which means normally demand doesn't fall off even when prices rise precipitously because you have to pay for oil. And like you said, Steve, if the economy is legitimately booming, oil prices go up. You're not happy about it. It's painful. It's not great, but you pay the cost and you move on and the economy can adjust. When the system is weak, it can't. And so therefore, demand destruction shows up. And it's not just demand destruction of oil. It's all the stuff that goes along with it that's leading to lower demand for oil. Yeah, Jeff, and people I'm talking to every day, we're seeing signs that people are driving less. They're cutting back on their vacation plans or it's like, hey, we already paid for this year. So it's a done deal. But after that, but virtually everybody I'm talking to and even people that are high income earners say, you know what, I'm starting to realize what's coming here and I'm cutting back too. And so that's the challenge. That's the problem where this thing starts to spiral to the downside. Of course, we know exactly the central bankers are going to react. But as they always do, they're going to make the wrong move. They're going to raise rates and then turn around and have to rapidly lower. The problem is this time. And again, we look back at prior cycles. As you said, they'd love to drop 400 basis points. The problem is they don't have that room to run. They don't have the tools. They don't have anything to really stop this. So yeah, what can we expect going forward? At some point, we're going to hit a breaking point. Central bankers, we're going to cut. We're going to see a fast path down to zero. The problem is just like raising rates isn't going to control or restricted demand, lowering rates isn't going to kick up a huge amount of supply. It's not going to be stimulative. And the problem is what we're now facing is a very realistic fact that the global economy is going to hammer get hammered on this energy shock. And it's going to be prolonged. And central bankers, once again, will have absolutely no answer on how to fix it. Absolutely right, Steve. And another point to watch as far as this point of no return, central bankers who right now are all over oil prices are inflation rate hikes. Once they suddenly pivot to talking about jobs and rate cuts, that's when, you know, when they start going back into the Pringles can, you know, it's already too late, which is why they're going to you're probably going to hike rates more than anybody else. Because that's what they do. But they do. Hey, is it 2008 again? We should hike rates because that worked out really well last time. People forget 2011. They hiked rates twice in 2011, just before the recession started. They're really good at this.