High Gas Prices and Recession Appear to Be the Cost of Defending Democracy – Barron’s

Written by Amanda

Smoke billowing over the oil refinery outside the town of Lysychansk yesterday, amid the Russian invasion of Ukraine.

AFP via Getty Images

The fundamental cause of the world’s immediate economic woes is clear enough.

Crude oil prices are up more than 50% this year. That has caused gasoline prices to skyrocket and spurred consumer-price inflation to the highest levels in four decades. And in turn the Federal Reserve and other central banks are now raising interest rates as fast as they can.

The combination of higher rates and inflation put us on pretty strong odds of a recession, economists say, if not this year then next.

The obvious next question is, who is to blame?

Fed Chair Jerome Powell will get an earful when he visits Capitol Hill Wednesday from politicians who will say he should have raised rates earlier. Prices had started creeping up before oil prices went ballistic, but the economic outlook was also shaky. The need to depress demand is much clearer in hindsight and still wouldn’t have stopped gas prices from spiking.

The Biden administration has pinned some blame on oil companies, and President Joe Biden himself gets flak for his fiscal stimulus. But none of it rings true. Cutting the federal gasoline tax is at best a temporary fix that won’t help much.

There is really just one clear reason for the problem, and that is Russian President Vladimir Putin’s invasion of Ukraine in February. More specifically, it is the world’s decision to wean itself off Russian energy in response.

Not many people are talking about it in these terms, but the cost of that decision by the West is a recession.

If that is the price of drawing a line in the sand against tyranny and aggression, it may well be worth it. But politicians are having an awfully hard time summoning the courage to say that paying more for gas is what it takes to preserve democracy and world peace.

Brian Swint

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Fed’s Barkin Signals Support for Another Big Rate Hike

Richmond Federal Reserve Bank President Tom Barkin told a meeting of the National Association for Business Economics that another interest rate hike of half to three quarters of a percentage point was a “pretty reasonable” expectation for July, given persistent and elevated inflation.

  • Barkin’s words echoed Powell’s own assessment after the central bank raised its benchmark rate by 0.75% last week. The futures market is pricing in a 98% chance that the Fed will raise rates by 0.75 point at the July meeting, according to CME’s FedWatch tracker.
  • “We are in a situation where inflation is high, it’s broad based, it’s persistent, and rates are still well below normal,” said Barkin. “The spirit is, you want to get back to where you want to go as fast as you can without breaking anything.”
  • Analysts have been placing odds on the likelihood of a recession. Goldman Sachs economists now put the chances at 30% within the next year, though any downturn would likely be shallow, meaning the rise in unemployment and slowdown in growth would be less painful.
  • The S&P 500 slumped into a bear market last week because of recession fears. Barkin said Tuesday those concerns were “totally understandable” given all the outside shocks, but noted that the data still look relatively healthy.

What’s Next: Powell is scheduled to make his semiannual appearance in Congress this week to testify about the state of the economy, starting in the Senate Banking Committee today at 9:30 a.m. Eastern time.

Evie Liu


Biden Calls on Congress to Approve Gas Tax Holiday

The White House said Wednesday it is calling on Congress to suspend the federal gas tax for three months, and asking states to take similar action to provide relief for Americans grappling with soaring pump prices.

  • Biden has come under intense political pressure to tackle the issue of record-high gas prices, having discussed it with advisers over recent months, The Wall Street Journal reported. Biden has also asked oil companies for ideas of how to increase production and lower prices.
  • Oil prices fell in reaction, with Brent crude, the international benchmark, down 4.15% to $109.89. West Texas Intermediate, the U.S. standard, dropped 4.7% to $104.37.
  • The White House said: “President Biden understands that a gas tax holiday alone will not, on its own, relieve the run up in costs that we’ve seen. But the president believes that at this unique moment when the war in Ukraine is imposing costs on American families, Congress should do what it can to provide working families breathing room.”

What’s Next: The federal government charges an 18 cent tax per gallon of gasoline and a 24 cent tax per gallon of diesel. Biden will also call on states to temporarily suspend state fuel taxes, which are often higher than federal rates. Several states including New York and Connecticut have already suspended fuel taxes.

Lina Saigol and Brian Swint


Existing-Home Sales Fall but Prices Soar to Another Record

Home prices continue to soar to records, with May’s median price rising 14.8% from a year earlier to $407,600. The flip side to this is a drop in the number of existing-home sales, which are at their weakest since mid-2020 as mortgage rates climb.

  • The effect of rising rates on home sales wasn’t entirely reflected in the May numbers, which were recorded before the spike in mortgage rates in June to above 6% for a 30-year fixed loan.
  • Home builder Lennar beat expectations as revenue rose 30% for the year ending in May while net income rose by 59%. Lennar executives said would-be buyers in many markets are now pausing to reconsider because of rising rates and soaring home prices.
  • Mortgage applications are down. Lennar said locations with significant softening in demand include Raleigh, N.C., Minnesota, Austin, Los Angeles, Sacramento, Seattle, and California’s central valley.
  • Inventory for existing homes is expected to build over the summer, but home-building activities are dropping off because of supply-chain strains, rising material costs, and labor shortages.

What’s Next: Existing-home sales are expected to drop 6.7% this year from 202, said real estate firm Realtor.com. Yet, home prices are likely to remain elevated for the rest of the year, with the median sales price for existing homes expected to rise 6.6%.

Evie Liu


More Than 300 Companies Sidestep Market Volatility, Awaiting IPO

Missing all the splashy initial public offerings these days? More than 300 companies are waiting in the wings for the IPO market to reopen amid volatility that has seen the number of deals drop 74% from this time last year.

  • Just 47 companies have listed their shares in a traditional IPO through June 17, down from 180 companies that went public through this same time last year, according to data from Dealogic. Deals valued over $100 million remain largely on pause.
  • Nearly 320 companies were on file with the Securities and Exchange Commission for an IPO as of June 10. These IPOs remain active, which means the companies could list whenever they want.
  • Among IPOs expected this year: Instacart, the grocery delivery app, and Mobileye, the self-driving division of Intel. Chobani, the yogurt maker, delayed an offering and said in March it would go public when the IPO market returned, which could be in the second half of 2022 or 2023.
  • Companies tested the market this year with limited success. Bausch + Lomb , the eye-care company owned by Bausch Health, ended its first day of trading in May with a $7 billion valuation. The stock has since fallen below its $18 IPO, ending Tuesday at $15.50.

What’s Next: Amid the pause, Ivanhoe Electric set terms on Friday for its IPO, which could raise as much as $180 million if it prices on the high end. The Canadian mining company is scheduled to price its deal on Thursday, Barron’s reported.

Liz Moyer and Luisa Beltran


FTC Examining Pricing Deals for Insulin as Costs Soar

The Federal Trade Commission is gearing up enforcement against pharmaceutical industry practices that it suspects have contributed to the quadrupling of prices for the diabetes drug insulin in the last two decades, specifically deals between the drugmakers and pharmacy-benefit managers.

  • Health insurers hire pharmacy-benefit managers to lower drug costs, but this arrangement may actually have increased insulin costs by preventing lower-cost generics from entering the market. Name brand drugmakers pay rebates and fees to PBMs to keep market share.
  • The dominant insulin sellers in the U.S. are Eli Lilly , the Danish company Novo Nordisk , and France’s Sanofi . The big PBMs are CVS Health ’s CVS Caremark, Cigna ’s Express Scripts, and UnitedHealth Group ’s Optum Rx.
  • Lilly offers plans that limit user’s costs to $35 a month. Sanofi said the price it gets for insulin, after PBM rebates and fees, has declined for seven years, and Novo Nordisk said its price has dropped for five years.
  • A May 25 comment letter from the PBM trade association said they are the only actors dedicated to containing drug prices. Express Scripts and CVS Caremark told Barron’s they are cooperating with the FTC, pointing to the trade group. Optum also pointed to the trade group for comment.

What’s Next: The FTC is seeking documents and data from the largest benefit managers as it looks into the impact of PBM practices on pharmacies, health plans, doctors, and patients. The PBM trade group said it expects the FTC’s inquiries will show its members are the inflation fighters they say they are.

Bill Alpert


Dear Quentin,

I am very fortunate to have a steady career and a 401(k), and I have been able to put money aside for my children’s education. This was not always the case as I had several years of education and a six-figure debt that I accrued, and I have learned to be very cautious with money. I bought a really nice house that cost $200,000.

My best friend got dug into her career after college, and recently upsized to a $600,000 house. Our families have taken vacations together, and we have always split things down the middle without money ever being a sore subject. It recently came up in conversation that neither she nor her husband have a 401(k); to be honest, I was shocked.

I really enjoy my friend’s company, and I want to continue to do things with her. I don’t feel like it is my place to police her spending habits, and I don’t want to put her in an uncomfortable position either. She keeps on suggesting that we take a spa weekend to a mountain retreat for our 40th birthdays.

Should I give her advice on how to get her financial house in order?

—Best Friend

Read The Moneyist’s response here.

Quentin Fottrell


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—Newsletter edited by Liz Moyer, Camilla Imperiali, Steve Goldstein, Rupert Steiner

Source: barrons.com

About the author


Hi there, I am Amanda and I work as an editor at impactinvesting.ai;  if you are interested in my services, please reach me at amanda.impactinvesting.ai