The Days Ahead:

  • Small businesses survey and inflation.

This Week:

  • The frequency and length of U.S. recessions has declined in recent years.
  • Corporate profits as a percentage of GDP is the largest in the world.
  • Labor’s share is down from Covid-19 highs but not much changed from in 30 years.
  • Stock market returns have been a second half of the 20th century and 21st century phenomenon.
  • The U.S. is the world’s largest oil producer…
  • And the largest gas exporter.
  • It’s now much easier to ship gas from Texas to Rotterdam.
  • And it’s’ going to get easier.

Can That Be Right?

Sometimes, you come across a chart and think, wait, that can’t possibly be right! We came across a Substack note, which commented about how investing in U.S. stocks has shown great results but that it’s been mostly a second half of the 20th century and 21st century phenomenon.

If you bought $1,000 of the Dow Jones Industrial Average (DJIA) in 1900 and just held the index stocks, you would have had $3,329 by 1950.

Figure1 DJII 1990-1950 Chart
Source: Cerity Partners, FactSet

There were bumps along the road with 13 recessions in the first 50 years of the 20th century. The average recession length was 18 months with the longest at 43 months from 1929 to 1933. The average period of expansion was 30 months with the longest lasting 80 months from 1938 to 1945.

But the second 50 years of the 20th century and up to March 31st, 2024, were a lot better. If you’d taken the $3,329 you had in 1950 and kept it in the DJIA, it would look like this:

Figure2 DJII 1950-2024 Chart
Source: Cerity Partners, FactSet

The $3,329 would have been worth $152,000 in 2000 and $563,852 in 2024. This was a much easier time. There were nine recessions in the 50 years from 1950 to 2000 with an average length of 10 months. The longest recession was 16 months from 1973 to 1975. The average expansion was 60 months and the longest was 106 months from 1961 to 1969.

The average annual return from 1900 to 1950 was 2.4% and the average return from 1950 to 2024 was 7.2%.

We’d add here that the DJIA is an index and it’s not possible to buy an index directly. An investor would have had to buy and sell the individual stocks in the index, at least up until the invention of the first index fund in the 1970s. But what we’re showing here is the phenomenal growth of stocks and returns in the last 74 years.

What happened? Well, to start with the obvious, the economy grew. Average GDP per capita rose from $1,900 in 1950 to $82,000 in 2024.

But we’d also put it down to two major reasons. First, is the share of corporate profits and wages in the economy. Corporate profits rose from $19 billion to $3,414 billion and as a percentage of GDP went from 6% of GDP to 12%.

Figure3 Corp Profits GDP Chart
Source: FactSet, 04/01/2024

The blue line shows corporate profits rising to a record in the last quarter of 2023 and corporate profits, as a percent of GDP, up in 2023 from 11.7% to 12.2%. That compares to 7% for Germany and 4% for Japan. Since 2009, U.S. corporate profits have grown 160%, while GDP has grown 90%.

If the corporate profits as a percent of GDP are that high, what’s the share of labor? Well, in the U.S. it looks like this:

Figure4 Wages GDP Chart
Source: FactSet, 04/02/2024

We looked at private wages only, excluding government wages that often have automatic inflation adjustments. Wages as a percent of GDP were on a steady decline from the end of the 1970s falling from 39% to as low as 34%. The line is spiky because of bonuses, overtime and data timing (GDP is quarterly and wages monthly). The increase in the 2010 to 2020 period was mainly because GDP grew around 40% in the 10 years to 2020 after growing 86% in the 15 years to 2010. In other words, growth was slower and wages were broadly static.

In the immediate months after Covid-19, the share of wages as a percent of GDP climbed steeply from 36% to 39%. But all that was going on was that GDP declined and higher paid, mostly service employees, stayed in their jobs. As soon as growth resumed, output and profits increased and the wages share fell to pre-Covid-19 levels. In the last year it’s drifted down by around 1%.

So, the first explanation is that U.S. companies are profitable and their share of GDP is high and has trended up for 40 years.

The second reason is better fiscal and monetary policy. In the 1900 to 1950 period there were 13 recessions lasting a total of 238 months. The economy was in recession 40% of the time. From 1950 to 2024, there were 11 recessions lasting a total of 113 months. The economy was in recession for 12% of the time. In the last 30 years that dropped to 10% and in the last 14 years (ok, we’re cherry-picking some numbers here) to 1% of the time.

Since 1997, the U.S. economy has been in recession for a total of 28 months or 9% of the time. In the same period Japan and Germany saw 11 recessions between them and were in recession 33% of the time.

The U.S. has responded to the, GFC and Covid-19 recessions with a swift mix of fiscal and monetary policy solutions. They may have seemed ponderous at the time but compared to the slow and insufficient response in Japan and Germany, they were decisive and early.

This is not to extol uncritically the strength of the U.S. economy. Many point to income inequality, deficits and low corporate taxes as real problems. But returns to shareholders in the second half of the 20th century and the last 24 years have been unmatched elsewhere.

U.S. as an Oil Exporter

The U.S. is the world’s largest oil producer. For those of us coming of age in the 1970s, this is quite an achievement. This is how it looks:

Figure5 Oil Production by Country Chart
Source: FactSet, 04/02/2024

Production averaged 12.3 million barrels a day in 2023. The U.S. has produced more oil than any other country for the last six years. The top three producers, the U.S., Saudi Arabia and Russia, account for 40% of total production. The next three, China, Canada and Iraq, account for about the same as the U.S. alone.

It will stay that way.

Saudi Arabia recently scrapped plans to increase capacity from 12 million barrels to 13 million. It only produces around 8 million now.

Russia produces around 10 million barrels and recently announced voluntary cuts, purportedly to keep prices high. But it’s more likely that sanctions are taking some of the demand and the announced cut of 500,000 barrels a day is probably more like 200,000. We know that Russian refined oil exports are down around 32% and some 700,000 barrels of refinery capacity have been destroyed. The price of Urals crude, the Russian equivalent to West Texas Intermediate (WTI), trades at a 16% discount to market prices compared to a 2% discount in February 2022. Russia can’t produce more and must sell at less.

Can the U.S. keep its leadership?

Yes.  Saudi Arabia’s reserves are around 267 billion barrels, which means it could carry on producing at current levels for 91 years. The U.S. reserves, at 69 billion barrels would last for another 15 years and Russia 26 years. But we’d not put that much emphasis on reserves. In 2008, the EIA, thought U.S. reserves were 19 million. New technology has tripled that estimate in 15 years. Venezuela has more reserves than Saudi Araiba and could produce at current levels for 1,129 years. But it has neither the resources or infrastructure to add to its current output of 730,000 barrels.

This leaves the U.S. as the major player in oil markets.

The U.S. became a net exporter of oil in 2022 when exports of 9.5 million barrels a day exceeded imports of 8.3 million barrels. In January 2024, the U.S. imported 6.8 million barrels a day and exported 10.7 million.  

The pattern of U.S. oil trade is to export and import crude and to later export and import refined products, such as gasoline, heating oil, diesel and jet fuel. A barrel of oil from Canada, which is the source of 62% of the U.S.’ oil imports, may cross several borders in crude and finished form before it ends up in its final market.

U.S. export markets are very diverse. The Netherlands takes about 11% of US exports, followed by Mexico, Canada and China. Exports to the Netherlands are around 1.1 million barrels up from 0.53 million in 2022. The Dutch sanctions on Russian oil imports were quickly replaced by U.S. imports.

The spot price for European oil is based off the Brent crude oil price. Brent is the benchmark for about two- thirds of the world’s oil whether or not it comes from the Brent oil field in the North Sea. It’s easy to refine and because, historically, the main markets in Europe are near to the main producers in the Middle East, it traded at a higher price than WTI. WTI was always cheaper because most of it stayed in the U.S. and shipping was expensive. There was also an embargo against the U.S. shipping oil overseas that was only lifted in 2015.

The gap was typically $5 to $7 with Brent trading at the higher price. The gap is now around $3.50 and one reason is that Brent futures now includes WTI. This has made it a lot easier for European buyers to choose WTI over Brent, or any of the other 160 types of oil that are traded. In addition to the big increase in exports to the Netherlands, France’s purchase of U.S. oil rose 140% from 2022 to 2024, and Spain by 185%.

The upshot of all this is that the U.S. exports a lot of oil and liquefied natural gas (LNG).

Figure6 US Oil and Gas Exports
Source: FactSet, 04/02/2024

U.S. exports of oil and natural gas increased 80% and 97% by value in the last four years. The U.S. is now the world’s largest exporter of natural gas after exports grew by 22% in 2022 and 7% in 2023. The U.S. cost of LNG production is very low. The price of 1,000 cubic feet of gas in Texas is $1.86 compared to $7.22 in Rotterdam. Even liquification, storage and transport costs don’t close the gap by much. A large capacity LNG carrier can take on board $17 million worth of gas in Louisiana, pay the $130,000 per day ship operating costs and unload the cargo at Rotterdam for $66 million.

We have a soft spot for showing engineering marvels whenever we can. This beauty is the Mozah, the world’s largest LNG carrier:

Figure7 Mozah Nakilat's Flagship Vessel

It’s a Q-Max carrier. Remember we discussed Panamax class of ships, that were the biggest  that could fit through the Panama Canal? And a Suezmax class, which is the biggest that can fit through the Suez Canal? Well, the Q-Max means they can dock at Qatar, which is a huge natural gas exporter.

Mozah is not only long, at 1,100 feet, it’s over three football fields, it’s wide. We’re taking really wide. It’s 177 feet. If you ran around the deck twice (doesn’t come with running track), you would have knocked out a mile. It carries 9.4 million cubic feet of LNG or 564 million cubic feet of regular gas – about what Norway uses in a year.

The U.S. last build an LNG carrier in 1980. There are about 600 LNG ships in the world and 90 on order. South Korea builds 67% and Japan 22% of the world’s LNG ships. LNG shipping, storage, gasification, chartering, bunkering and trade is a thriving business.

We’ve written before about the U.S. boom in oil and gas. In the last year, growth has continued and the U.S. has become a vitally and strategically important player in the energy world. Every incremental barrel of oil or cubic foot of gas is now likely to be exported. That should put a solid floor under U.S. growth for some years to come.

The Bottom Line

Markets traded in a “With” pattern, down on Thursday and up on Friday and at one point were down 1.2% on Wednesday. The weekly jobless rose to 221,000. Claims, apart from a one-week blip in January, have run between 210,000 to 213,000 since last October. It may be nothing more than seasonal adjustments as Easter came at it’s earliest since 2017. But then on Friday, we saw a stronger employment report.

Two notable economic news items were the ISM services and manufacturing surveys. The manufacturing survey was at 50.5 and its highest since October 2022. The Fed has never cut rates when the ISM survey is above 50 and the unemployment rate below 5%. On the services side, the prices paid index fell to a four-year low. For most services, the major component of “prices paid” is labor. That should be good news for inflation.

The 10-year Treasury traded at 4.36%, down from recent highs of 4.43% but well above the 3.90% rate we started the year. The bond market seems to have accepted that rates cuts will be slower to come and the economy stronger for longer.

Stocks have remained firm. We’ve been glad to see the S&P 500 Equal Weight index keep pace with the S&P 500 market cap index over the last month and outperform it in the last 10 days. This means the market strength is broadening and that’s a good thing.  

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Art of the Week: Megan Rooney (b. 1985)

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