Listen to Christopher J. Wolfe, Chief Investment Officer of First Republic Private Wealth Management, speak about rising gas prices, the financial markets, the Russia-Ukraine war and inflation during a conversation with radio host Mark Thompson of KGO-AM in San Francisco.
Read below for a full transcript of the conversation.
Speaker 1:
He joins us from time to time to talk about economics, the economy, local, national, international. He can break things down so well — that’s what I like about this guy. He is the Wolf of San Francisco: Christopher J. Wolfe, everybody. Yeah, what’s up, sir? Welcome.
Speaker 2:
Thank you, Mark. It’s great to be back. Thank you.
Speaker 1:
So, you know, today’s a big day in terms of the release of this, uh, fuel reserve. And I’m wondering if you can just give us a moment on gas prices, the release of these strategic reserves and how that might have an impact on the gas prices that we’re seeing both here in California and elsewhere.
Speaker 2:
Yeah. So, Mark, what you’re touching on is the Strategic Petroleum Reserve. So, uh, way back in the day, the United States, uh, post the 1970s oil embargoes built up, uh, oil reserves in salt domes in the Southern part of the country: Texas, Louisiana, et cetera, for emergency purposes. And they can be released according to presidential decree and a few other emergency states. And what the president has decreed is we should release some oil from those, uh, reserves and it’s about a million barrels. Um, it's not a lot. Uh, and I, I don't mean to pooh-pooh it. I, I think it’s a confidence sign that, you know, the president’s trying to do something, but kind of the simple reality here is, you know, the, the us, uh, consumes depending on how you measure it up to 18 million barrels a day. So I, you know, this is really something I think is more psychological in many ways. And as a result may not have a really large impact on, uh, prices throughout the country. And I, I think if anything, it’ll have a very minor impact on any, uh, prices at the pump in California. And there’s a whole bunch of other reasons for that. But I think the bottom line here is this is a thing they’re trying to show. They’re taking some action, but the net result may not be a lot for, um, some structural reasons.
Speaker 1:
So much of the economy is psychological though, Chris. Isn’t that the case?
Speaker 2:
Yeah. You know, things run on sentiment, you know, are you happy? You know, that what, uh, Keynes, you know, um, John Maynard Keynes and others described as the animal spirits, uh, you know, way back in the ‘20s. And he even, you know, you go back to Adam Smith way before that the, the reality is sentiment and emotion do matter. And right now things like high gas prices are really kind of dragging down consumer sentiment. And that’s, that's a tough place to be. The good news though, is business sentiment is kind of hanging in there because why? Profits are actually really good inflation is this two-sided story where profits will be good as long as costs, don’t rise as fast as profits rise. So that’s probably a, a different kettle of fish, but right now, business sentiment hanging in there, consumer sentiment, more sensitive to oil prices and not so good right now.
Speaker 1:
Uh, the John Maynard Keynes and Adam Smith reference should get a ding, I think Chris, please. Thank you very much. I, I, I wanna, Chris, I wanna ask you about this, uh, tax that’s being proposed on yeah. Households that, uh, have, uh, that are worth a hundred million dollars or more. Okay. When I, you know, in other words, it’s not just income, it would be, and that’s sort of the, uh, you know, we, we’re used to seeing income tax proposed and different kinds of innovative taxes proposed for those, with incomes that are particularly high. This would not be that. This is the proposed lot of this administration. Could you review that and maybe just, uh, speak to how that might make an impact and, and it’s viability to actually become law.
Speaker 2:
Yeah, yeah. In a nutshell, what they’re trying to do, or what Washington is trying to do is to tax, uh, capital gains that you haven’t realized yet. Basically the change in your wealth, the change, for example, if you own a company that’s listed on the stock market, and it goes from $10 a share to a hundred dollars a share, you know, know you did really well, and let’s assume that you’re worth a hundred million, that, and this tax would affect you. The, the government is proposing to tax those changes in value that even if you didn’t sell your shares, um, they wanna try to tax it. Now there’s some reasons for that. And it’s because, well, you know, we need to think about how we’re trying to create tax equality across a broad swath of the economy and, you know, folks that, uh, see their gains go up a lot in the stock market don’t pay a lot of tax. That’s just the way it works. I think the challenge around that is really gonna be an accounting one, and it’s gonna make it really difficult, uh, for measuring when the stock, you know, it went up what price it hit. And when you have to pay the tax, you realize that if you have a loan or you have some other things going on, I think it has the potential to be very, very messy. And as a result, I think the odds of it passing are, are actually quite low.
Speaker 1:
Yeah. I, I, I suspect you’re right. It’s interesting though, because just to spend a moment on it, I mean, they can assess values. That’s what, uh, the IRS asks you to do, right? Where kind of, uh, the number of holdings you might have, uh, you know, real estate, uh, uh, stock portfolios, et cetera, you might be able to, uh, declare a value, they’ll assess a value and, you know, based on that, you’ll pay a tax on it. And you can, I should also say, Chris, you know, you can borrow against a lot of those holdings, right? I mean, in other words, you can, I can, right now, if I have millions of dollars in holdings, I, I can borrow against them. So in a sense, you know, it’s fair to consider those holdings, uh, taxable on some level, you know what I mean?
Speaker 2:
Yeah. The concept I understand. Well, and I think people, you know, get the idea that we’re trying to be fair, but the execution of it is just riddled with a lot of different issues. So just as an example, what about companies that are private, who says what the value of those things are, public companies, the market says, but what if your stock isn’t traded very often? What if you made your money in bonds, which don’t trade often? I’m giving you lots of what ifs, but that what if scenario, it means this gets what-iffed to death, I think.
Speaker 1:
I see what, let me look about, uh, uh, talk about it and look at the situation in Ukraine. Uh, you know, we’ve started with the, this oil price thing and, and, and price at the pump, et cetera. Uh, there are other ripple effects of this war, right?
Speaker 2:
Speaker 1:
Talking about economic effects. I mean, obviously, it’s a humanitarian horror show, but I’m talking about economic effects, because we’re talking to you.
Speaker 2:
I’ll just stay on the economic front. I, I think there’s three big things to take away. What’s happening. Number one is the sanctions that Europe is imposing on kind of the, uh, receipt of, you know, Russian gas or oil, et cetera. And the challenges that’s creating are likely gonna put Europe into a somewhere later this year, if not in the early part of ‘23. So that’s one thing. The second, to your point, is this is more than just oil. Uh, the, you know, Russia, Ukraine, you know, worth something like 25% of all the world’s wheat exports. Um, there’s many ties that Russia has in particular to metals exports that are used in electric vehicles. You can see where this goes. There’s a lot of things that Russia provides commodities basically, uh, that are necessary in a lot of different parts of everyone’s everyday lives.
Speaker 2:
So the challenge is you gotta either, if you’re going to sanction Russia and not buy their commodities, you gotta find another source. Or, and if you do that, you’re probably gonna have to pay a lot more. And here’s my third point. That’s where some of the inflation comes from. It’s if you’re not buying from Russia, even though they’re a source because of what’s going on, then you’re gonna buy from somewhere else and you’re gonna pay more. And those higher costs either hurt your profit margins or you try to pass ‘em on. And that’s what inflation looks like. So I’ve put all this together to say that the tendrils of inflation are getting longer, this goes on in Russia and Ukraine. And that’s, that’s really one of the big risks that not just Europe, but the U.S. will face.
Speaker 1:
Uh, tendrils is a ding word by the way, please, Chris, thank you very much. Um, you, uh, yeah, it's pretty impressive, I have to say. Uh, so the causes of inflation we’ve reviewed before. I’m talking about this particular inflationary spiral. We talk about, I believe, pent-up demand. Um, you talked about supply chain issues, uh, and, and oil prices. So these are things that the administration I’m just now kind of getting to the politics of it can really have a limited impact on. As you look ahead, uh, what do you think is the likely inflation curve that we’re gonna be part of?
Speaker 2:
Well, Mark, you’re 100% right. There, there is a limited role the government can play to try to fix all these things. You know, maybe there’s some work they can do around negotiating with dock workers. For example, they’re threatening to strike on the West Coast. Uh, but there there’s really just it’s, it’s fairly limited. You’re right. I, I think that the arc of inflation though, because there are other things besides what we just mentioned, supply chain issues, uh, inflation driven by commodities. There’s also home prices. Home prices have been a kind of creeping part of the inflation story for the last 18, 24 months. And they look like they’re starting to slow down a bit. Cost of money’s going up. Mortgage rates are now at relative highs. And I think here is that, you know, we’re likely to see at least certain home markets start to cool a little bit.
Speaker 2:
So this isn’t a bad thing for inflation. It means the inflation story, which right now the Consumer Price Index is about 8%. We think it’s gonna print 8% in April, probably trend towards four and a half to 5% by the end of the year, for two reasons: one, home prices slow down and two, is, I think we’re gonna get to a place where, uh, we’re gonna see more production of oil just on a slow and steady basis by the end of this year, coming out of the U.S. and other suppliers, the Middle East, as well as South America, that will take off some of the pressure that the, um, uh, Russian withdrawal has, uh, has caused. So those two things cool inflation a little bit by the end of the year.
Speaker 1:
I know I have to wrap up with, uh, Christopher J. Wolfe. He’s the Wolf of San Francisco, Chief Investment Officer of First Republic Private Wealth Management based in the city. Uh, but I, I got into kind of an argument, and I sort of a, I don’t mean to be a hothead, Chris, but occasionally I, somebody gets to me. I think they’re trying to get to me. And so I, uh, I I’m passionate. Thank you. That’s exactly what it is, but I wonder if you could speak, this is a meta question. Okay. It’s kind of a big picture question. We were talking about alternative energy versus, uh, fossil fuels, you know, traditional, dirty fuel. If you wanna think of it that way, I, uh, was saying that, uh, this is an inflection moment. I thought, it’s a moment of opportunity for alternative energy because now the price of that fossil fuel is now getting to the point that it really prices in a lot of these alternative energy ramp-ups that are being attempted. Uh, and the caller was sort of coming at me saying the market’s a free market. And if alternative energy really had a chance, it would be supported by the market. Uh, Chris, you know, as well as I do, it’s not a free market.
Speaker 2:
Well, that’s a loaded question.
Speaker 1:
Look, yeah. It’s I know this is a big question him, but, but please, I mean, uh, we, you know, uh, the tax breaks that are given to fossil fuels, I’ll shut up and let you talk, but I’m just saying it’s really not a free market economy.
Speaker 2:
It, there are distortions everywhere in the market, you know, you’re right. Tax breaks, incentives, very cheap drilling rights in the United States, et cetera, and there’s subsidies for all sorts of things, solar wind, et cetera. So the distortions are there. I, I think rather than focus on the pricing mechanism, which is, I, I think an important one. I think the other piece of the puzzle is, is maybe worth considering because it’s more important. And that’s the energy that hydrocarbons meaning oil and gas provide to the world is really a rich source of it. It just costs us a lot by damaging the environment. These other things are mostly metals-based. Meaning batteries are made out of metal like cobalt and nickel and lithium, et cetera. You can’t make the world go from hydrocarbons oil and gas to metals, cobalt, and lithium all at once. It will not happen. You will break many … you’ll break the world. That’s a very dramatic statement. Likely things will evolve things over time. And that’s really the key and what we need. I think if you’re in the, U.S., there are two things: one an energy security policy, but more importantly, a migration path right now, it seems to be all or none and all, or none. It really means everyone focuses on the price. And the issue here is the time, not the price. It’s gonna take us 25 years. And that’s really the key.
Speaker 1:
I, I love that answer because I think it, it dignifies both things, uh, the distortions, and then the future. And I agree with you, it’s a process. Uh, so I’ll sign on to that. And that’s why you’re the Wolf of San Francisco. He’s Christopher J. Wolfe, the Chief Investment Officer of First Republic Private Wealth Management based in the city. Chris, we love you. Come visit again soon.
Speaker 3:
Thank you.
Speaker 1:
Yep. Really good stuff. Always good. You know, Brett. Yeah. Always brings it, makes it easy to understand. Yeah, he does break it down so beautifully.
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