Risk level: Orange - High

RED: Severe (+/- 4%) ORANGE: High (+/- 2%)  YELLOW: Elevated (+/- 1%)  BLUE: Guarded (+/- ½%)

THE BOOSTER SHOT

•             There's a fear factor that could be running underneath the market stream
•             The two "I" words – inflation and impeachment -- could have interesting links
•             If the price of oil inversely related to GDP, this week's rally is telling

The "I" word overshadowed some of the major international developments this week, and we don't mean Fed Chair Jerome Powell's statements on inflation at the Jackson Hole symposium. We mean, of course, impeachment. If the claims made by long-time "fixer" Michael Cohen are accurate, Trump at the very least has a poor memory when it comes to politicking. We've already traced a theoretical argument for waning confidence in U.S. leadership that suggests the president is at best secondary to systemic momentum. Now, however, we're forced to confront questions about U.S. confidence more directly. Recent consumer confidence measurements pointed to waning optimism and the latest poll AP-NORC poll found nearly three quarters of those surveyed said Trump's trade policies might cause prices for everyday goods to go up. That's inflation. While significantly weaker than it was in the 1970s, there is at least a loose relationship between inflation and the price of oil. Because it takes time for the price of oil, meanwhile, to catch up with the economy, we may not see it have an impact on U.S. momentum just yet. But it could be a sign of things to come. For the week, it was a large draw on U.S. crude oil inventories, a dovish stance by Powell and some signs of a drop in the global trade war temperatures driving the price of oil. The movement in the price of Brent crude oil for the week was above what our scale accounts for, ending up 5.29 percent to close the week at $75.63 per barrel.

"I tell you what, if I ever got impeached, I think the market would crash," the president said this week. "I think everybody would be very poor, because without this thinking [points to his head], you would see numbers that you wouldn’t believe in reverse."

A 2004 report from Jennifer Jerit at Southern Illinois University highlighted how political rhetoric and emotions are linked. Political leaders, she argued, have an incentive to use language that evokes strong emotions in the voting public. Emotions, meanwhile, trigger our first political response, leaving logic as a secondary stimulant. Jerit noted that fearful people are risk-averse and unlikely to want to change course. It's angry people that want change. Trump with his claim of economic collapse is using fear to keep calls for his impeachment at bay. On the campaign trail, he used anger to drum up support.

Fear is linked to anxiety over an uncertain future, which leaves people favoring the known over the unknown. Fear is the feeling people have when they lack confidence about their security in an uncertain future. The latest gauge of consumer confidence from the University of Michigan found sentiment dropped to its lowest level since September 2017. Consumers when asked by surveyors said they were concerned about the rising prices for household goods, vehicles and homes. According to Surveys of Consumers chief economist Richard Curtin, "consumers have become much more sensitive to even relatively low inflation rates than in past decades."

Speaking on Friday from Jackson Hole, Fed Chair Powell noted that inflation has moved above the comfort-zone 2 percent rate, but "we have seen no clear sign of an acceleration above 2 percent, and there does not seem to be an elevated risk of overheating."

Most Americans disagree, however. An Associated Press-NORC Center for Public Affairs Research survey published Friday found about 60 percent of those responding to pollsters questions said they disagreed with how Trump was dealing with international trade. Even worse, 72 percent said U.S. trade policy was causing the price of goods to go up. And in a testament to the perplexity of polling data, 51 percent also said Trump was doing a good job on the economy.

So what about the other "I" word. If there ever was a testament to a decline in confidence in the American system, impeachment is it. It's a quasi-political, quasi-legal action against the head of state. Comparisons between Collusion-gate and Watergate are commonplace in the recent news cycle. Against the backdrop of the Watergate investigation, the Nixon administration was navigating through a period of a dramatic spike in inflation, a stock market in free-fall and the Arab oil embargo. In the Trump era, the current bull market is on pace to become the longest one ever. But we're also reminded of Stein's law -- "If something cannot go on forever, it will stop."

On the more fundamental issues of supply, we are starting to see buyers move away from Iranian oil, indicating the slow drain of the millions of barrels of oil flowing from OPEC's third-largest producer has begun. With little spare capacity left in the market, we wonder if this week's rally in crude oil prices is a sign of things to come in November. There are loose indications to suggest that higher oil prices are correlated with a slowdown in growth in gross domestic product in the next year. Those watching the yield curve already know there are signs of a slowdown coming. OPEC economists said in their latest report the growth in U.S. GDP should hit 2.9 percent this year, but then slow to 2.5 percent in 2019.

With more of the people in Trump's inner circle getting immunity from prosecutors, we're expecting the cycle of fear to continue. If that spills over to a weaker dollar as confidence in the U.S. system wanes, this week's rally could continue. In upstream, Baker Hughes offered few headwinds with a decline in rig counts. Could that be an indication of rising costs of steel somehow?

It may be light trading week ahead because of the long U.S. holiday weekend, but there's no time to relax. On Tuesday, we get another look at U.S. consumer confidence, something to pay attention in the wake of the AP-NORC poll. The latest U.S. GDP numbers come out on Wednesday as do data on pending home sales.  Thursday brings a gauge of Canadian GDP and July consumer prices in the United States. The week ends with Chinese manufacturing PMI and the eurozone consumer price index.

We're going Orange for next week, expecting a run higher for crude oil. The British labor strike continues in the North Sea and we've seen two straight weeks of shockers from the EIA. The price could moderate, however, on easing trade tensions as Chinese officials said Friday that recent trade tracks were constructive.

Risk level: Yellow - Elevated

RED: Severe (+/- 4%) ORANGE: High (+/- 2%)  YELLOW: Elevated (+/- 1%)  BLUE: Guarded (+/- ½%)

THE BOOSTER SHOT

•             The times they are a-changin – and change brings volatility

•             Pay attention to stocks in U.S. distillates for early clues on economic momentum

•             Steering through tight economic corners requires a lot of political skill

We are still in a phase where geographically significant Turkey is also geopolitically significant Turkey. We pondered that extensively in our post last week by saying a Turkish pivot would have deep ramifications in the political geography of global oil and gas pipelines. If Turkey finds better friends in the Kremlin, we must then start to reconsider the belts of influence in the region given Moscow's long desire for regional influence. The nation state that controls the coasts controls the region, we said. Against that backdrop, meanwhile, are signs of a global economic cooling. Reuters oracle John Kemp pointed to demand in distillate fuels as a barometer for momentum. For the first four months of the year, stockpiles of those fuels in the United States declined faster than normal. Now, however, they're building faster than normal. With that in mind, we must review identity politics, the phrase du jour in theoretical circles that has deep roots in the cyclical nature of power. If transitions, economic or otherwise, are volatile, the price of oil as of late is a good indicator that things are changing. We were back in the win column last week with our Yellow alert, with Brent finishing the week down 1.35 percent to close Friday at $71.83.

               

In a recent column for the Carnegie Council of Ethics and International Affairs, we wondered if Trump's vague and sweeping claims were more meta than they appeared at first glance. We thought that deconstructing Trump's claim from the podium in Helsinki that "we're all to blame" for the collusion theories revealed populist enthusiasm for waning hegemony because of the way meanings are formulated in a socially constructed reality. Through that lens, the American president is insightful when he said Friday that "Turkey has been a problem for a long time." With the Ottoman Empire waning a century ago, it was Russian policy to take a patient approach to securing a geopolitical advantage by taking control of the Turkish Straits. With Turkish President Recep Tayyip Erdogan warning about external gamesmanship in the economy, we're reminded of the geographical and geopolitical significance of the region when the pivot was moving against the Kremlin tide three years ago. After the Turkish government in 2015 responded to Russian sanctions over the downing of an Su-24 warplane with threats to close the Bosporus Strait, the price of Brent crude oil moved more than 4 percent.  With Erdogan now expressing frustrations with the West, we're left to wonder about the consequences of Trump's policy of extending U.S leverage overseas by way of energy dominance.

If goods can't cross borders, armies will. If control over coastlines is indicative of geopolitical leverage, the United States is losing power overseas to Russia and China. That's not to forecast a looming war with Turkey, a NATO ally. But it does show that changes are afoot in the international landscape. Supporters of cyclical theories in international relations point to those profound changes as indicative of the evolution in the poles of global politics. Soviet economist Nikolai Kondratiev found a link between economic and military cycles. He observed that as economic cycles move from prosperity to recession, psychology changes as well. When the economy is doing well, people (or nations) are hopeful and want to keep the system that supports their prosperity in place. When things start to go bad, people (or nations) want change.  Carry this forward to the late Robert Gilpin's law of uneven growth. Gilpin said that as competitors to the established power in the international system grow, the hegemon's notion of prestige comes into question. When that happens, competition becomes intense and divisions among major powers widens. And when that happens, the potential for serious international crises grows. Returning to Kondratiev, a nation on the decline becomes paranoid. And when a nation becomes paranoid, it's easy to over-react.

The American president's outbursts on social media are indicative of a nation over-reacting to change. In early August, the Organization of Economic Development and Cooperation reported that its leading indicators were pointing to a gradual decline. At the same time, The Conference Board reported that second-half growth in the U.S. economy would likely represent the peak. Less support from monetary policy, like the expiration of U.S. taxpayer relief, will eventual drag on the U.S. economy, it found. Writing on Thursday, Kemp said trends in distillate fuels are adding to this sentiment. Because distillates account for about 30 percent of global oil demand, it's a bad sign when stocks start to build. U.S. distillate stocks drained through April at a faster rate than normal, but they're now building at a similar pace.

That plays well in the cyclical theories proposed by Kondratiev and others. But what about the cult of personality in identity politics? Markets move on the president's Twitter account and he knows it. Recall what happened when Trump in early June hinted of strong jobs data about an hour before the official release. What would happen on the geopolitical stage as trade disputes become personal? Writing on identity politics, international relations scholar Francis Fukuyama wondered about the fracturing of demographics with each emergence of a unique social group. With each new group comes a new grievance against others, and following the lines of cyclical theories, points to a breakdown in order.

"Democratic societies are fracturing into segments based on ever-narrower identities, threatening the possibility of deliberation and collective action by society as a whole," he wrote. "This is a road that leads only to state breakdown and, ultimately, failure."

Global political rhetoric smacks of paranoia and personalities. Trump spent much of the weekend turning his anger at the U.S. intelligence community and, with the Mueller probe moving deeper into his inner circle, we're left to wonder what's next. In the modern political era, the behavior of influential individuals has direct markets impacts.

Next week could be interesting on economic terms alone. On Wednesday, we get a look as U.S. Federal Reserve thinking with the August meeting minutes. We'll also see the price of crude oil swing when the U.S. Energy Information Administration releases its weekly data. If Kemp is right, we should be paying close attention to distillates. On Friday, however, things will get really interesting with the start of the annual U.S. Fed symposium in Jackson Hole. For that, we're issuing another Yellow alert for the week. Expect the price for Brent to climb on geopolitical tensions, but move lower if trade disputes escalate. The Fed and EIA will also big major market movers in the week ahead.

Risk level: Yellow - Elevated

RED: Severe (+/- 4%) ORANGE: High (+/- 2%)  YELLOW: Elevated (+/- 1%)  BLUE: Guarded (+/- ½%)

THE BOOSTER SHOT

•             There will be blood in the global trade war seen in the collateral damage

•             He who controls the coast controls the region. This matters for the Turkish pivot

•             Spending power in the world's leading economy is on the decline

President Trump last week opened a new front in the global trade war by turning his ire against NATO ally Turkey.  Steel trade from Turkey to the North American market could double to 50 percent, a target that's concerning for regional midstream bottlenecks. Meanwhile, the Chinese government has shown no signs of backing down in its reciprocal response to U.S. trade pressure. On the energy front, Beijing has taken a step further by committing to Iran.  The egos of nation states are overtaking concerns about constituent welfare. In the United States, the world's leading economy, an increase in consumer prices has largely wiped out any real wage gains. Globally, the International Energy Agency is warning of waning demand. All this has led to balance in the price of oil that's been hidden by daily volatility. Even with a 3 percent drop in Brent last week, the market was range bound and handed us our first miss in more than a month. We were right about volatility, but wrong about the end result with an Orange alert as Brent finished down a half percent to $72.81.

Trump on Friday lamented that U.S. relations with Turkey were "not good" and responded by doubling tariffs on aluminum and steel to 20 percent and 50 percent, respectively. Tensions between the two countries have been simmering since at least January when Turkish forces hit a U.S-allied Kurdish militia in Syria, suspected by Ankara of having ties with the militant PKK. But beneath the military tensions lie the fate of religious figures ensnared in Ankara's own political fractures. From a failed coup allegedly fomented from the United States in 2016, to Ankara's own political identity, Turkey is reflecting on its 60-year friendship with the West. Writing in The New York Times, Turkish President Recep Tayyip Erdogan accused Washington of consistently moving against Turkish interests.

"Unless the United States starts respecting Turkey’s sovereignty and proves that it understands the dangers that our nation faces, our partnership could be in jeopardy," he wrote.

The need of national leaders to save face in an era of political egos is hurting their respective constituents. The Turkish lira has been in a free fall and Erdogan last week called on the Turkish people to back it up by trading in gold and U.S. dollars for the national currency. For Trump, his hit on $1.2 billion in Turkish steel imports is compounding the woes for U.S. midstream companies faced with the lack of takeaway capacity. In the United States, companies like Plains All American and trade groups like the American Petroleum Institute, entities once considered part of Trump's base, are complaining about the rising costs for U.S. pipeline projects. Those costs could make it difficult for Trump to achieve has long sought after goal of broadcasting the political leverage of oil and natural gas overseas. If pipelines aren't reaching U.S. export terminals, the reach of energy, a proxy for power, is limited.

Erdogan warned that U.S. action against Turkey would weaken its influence overseas and convince Ankara that it's finally time to "look for other friends and allies." That search may ultimately end in the Kremlin, which been interested in extending its interest into the Balkans through Turkish territory for half a millennium. With the Ottoman Empire waning in the early 20^th century, it was Russian policy to take a patient approach to securing a geopolitical advantage by taking control of the Turkish Straits. Already influential in the Caucuses, a Turkish pivot would have deep ramifications in the political geography of global oil and gas pipelines. Turkey hosts the Baku-Tbilisi-Ceyhan oil, the second-longest pipeline in the world, connecting the capital of Azerbaijan to the Mediterranean Sea and the 600-mile Kirkuk–Ceyhan oil pipeline connecting the Kurdish north of Iraq to the Turkish coast. For gas, the European Union is keen on breaking Russia's grip on the energy sector with its Southern Gas Corridor that would connect Azerbaijan to Italy. Moscow, meanwhile, has its own gas objectives with its Turkish Stream project through the Black Sea. Erdogan's next move then could have profound consequences for global power. 

Turkey's neighbor, Iran, meanwhile, is in the midst of geopolitical repositioning in its own right. The remaining parties to the JCPOA – three European powers, Russia and China – are keen on keeping the deal alive. At stake in that agreement is about 1 million barrels of oil per day for a market with little tolerance for shock. On Saturday, China National Petroleum Corp. nudged French supermajor Total aside by increasing its stake in the development of the South Pars gas field in the Persian Gulf. That would give Beijing a strategic interest in what happens in one of the world's major oil chokepoints at a time when Tehran is flexing its military muscles in the Persian Gulf. If Iran's oil can't flow in November, the Iranian government has said, no one's will. With the South Pars agreement, China's voice in the Persian Gulf just got louder.

If control over coastlines is indicative of geopolitical leverage, the United States is losing power overseas to Russia and China. Strategic control is waning and friends are at a premium for the Trump administration to the detriment of strength through the economy. In its latest monthly market report, the International Energy Agency said it expected oil demand to increase slightly next year, but that was tempered by concerns about escalating trade disputes. Demand, its economists said, could cool down in the second half and into 2019. That voice of concern is getting louder as consumers see the price of everyday goods rise. In the United States, the Consumer Price Index increased year-on-year at its highest rate since 2011. That means U.S. wage growth, as well as the benefit of Trump's tax cuts, isn't enough to keep pace with inflation. Spending power in the world's leading economy is eroding.

Expect the trade war to escalate. There era of the political ego is reminiscent of the scene in Quentin Tarantino's Reservoir Dogs where criminal boss Joe Cabot is assigning pseudonyms to his gang of jewel thieves. Asked why they can't pick their names, Cabot says you get a room full of guys all fighting over who gets to be Mr. Black. Since nobody knows the other one, nobody wants to back down. We are witnessing a similar theme in trade disputes in that nobody wants to back down and it’s the components that make up the nation state that suffer.

This week starts off with a bang with OPEC releasing its monthly market report on Monday. That will be a telling indicator for trends throughout the week given the increased importance of EIA data. It was EIA data that pushed Brent down about 3 percent last week. On Friday, we'll get a look at U.S. consumer confidence with the latest University of Michigan survey. We're taking a lessons-learned approach for the week ahead and issuing a Yellow alert, expecting Brent to move by about 1 percent. Global trade tensions are causing collateral damage that could push the price of oil lower. OPEC's expectations of demand, meanwhile, could create tailwinds for Brent, though EIA data may be the determining factor in the week ahead.

Risk level: ORANGE - HIGH

RED: Severe (+/- 4%) ORANGE: High (+/- 2%)  YELLOW: Elevated (+/- 1%)  BLUE: Guarded (+/- ½%)

THE BOOSTER SHOT

•             China targeting U.S. oil and LNG hits Trump where it hurts

•             The systemic link between policy and power tell us to expect strategic mistakes

•             The U.S. trade gap could be telling for revisions in second quarter GPD

The Chinese government on Friday hit the Trump administration where it hurts by proposing tariffs on U.S. liquefied natural gas and crude oil. Capping off what was a relatively quiet week in geopolitical affairs, Beijing has now struck at the heart of Trump's quest for energy dominance. China's response followed claims by U.S. Trade Representative Robert Lighthizer that Beijing was skirting the law with its retaliatory trade policies. U.S. Secretary of State Mike Pompeo, meanwhile, griped that the Trump administration wasn't treated fairly by the Chinese, stressing it was an inherited trade regime that stacked the deck against the United States. All this followed second quarter gains in U.S. gross domestic product of 4.1 percent. A growing trade deficit, compounded by a recent increase in U.S. oil imports, could nevertheless undermine gains in the U.S. economy and lend support to sentiments that second quarter GDP was attributable to one-off factors. We're expecting economics and trade to dominate the narrative in the coming week. While those are more on the fundamental side of the market equation, those issues are indicative of broader dynamics in global power. With trade and second quarter earnings driving the market, we were within range of our scale with a Yellow alert last week as Brent lost 1.45 percent to close the week at $73.21 per barrel. That's now an impressive five weeks in a row for a spot-on call about the week ahead in the price of oil.

China and the United States spent the last few days in a blame-game over trade policies. Earlier in the week, China said it wouldn't respond to U.S. "blackmail" on trade and on Friday, its Customs Tariff Commission of the State Council said unilateral measures from the Trump administration breached multiple trade rules to the detriment of free trade. Speaking in Singapore on Saturday, Pompeo said it was China that was breaking the law. The Trump administration, he said, "desperately" wants a free and open trade relationship with its international partners.

"All the work that we’re doing in the trade arena is designed exactly for that purpose," he said. "President Trump inherited an unfair trade regime where American workers and American companies were not treated reciprocally or fairly by the Chinese, and the efforts of the Trump administration are to right that, to correct that, to adjust that."

Pompeo's remarks echo those from Trade Representative Lighthizer, who said President Trump was now proposing a 25 percent duty on $200 billion worth of Chinese goods because Beijing had "illegally retaliated" against the U.S. economy.

The trade tensions provide a backdrop for emerging economic and national power trends. An increase in crude oil prices in June and declines in the exports from the U.S. automotive sector drove the U.S. trade deficit to its highest level since November 2016, two months before Trump took office. That could impact later revisions to second quarter GDP growth, which stands at 4.1 percent so far. In its latest revision, real GDP growth reflected positive contributions from personal spending and exports. The Commerce Department reported on Friday that June exports, however, were $1.5 billion less than the previous month.

Joseph Nye, the former dean of the Harvard Kennedy School of Government, in a 2014 lecture on American leadership commented on the "rise of the rest" as a challenge to the U.S. position on the international stage. With IMF projections of a U.S. decline in the share of global production, Nye said the United States wasn't so much losing as other countries were doing more. On the possibility of China overtaking the United States in terms of power and economic potential, Nye said the real danger to the international system wasn't the shift in the poles of leadership, but in systemic entropy "leading to an inability to collect actions together and get things done." Charles F. Doran at the John Hopkins School of International Studies, meanwhile, united geopolitical history and economics into a single dynamic to explain state behavior. Plotting a general cycle of maturation and decline, Doran said changes in power lead states to struggle with their conception of reality and make misstates. The ingredients necessary for rational choice, he said, are absent and strategies become flawed.

These theories would suggest more mistakes are possible as both sides of the emerging trade war react to their positions of power, perceived or otherwise. Recall that last week, we noted that Sen. Bob Corker, R.-Tenn., the chairman of the Senate Foreign Relations Committee, wondered if there was any real strategy in the Trump White House. Or is it, he wondered, that the president – to borrow from Nye – is in a position to undermine the institutions to "get things done." Forced to search for new foreign policy roles, a nation struggling with direction will feel threatened and more likely to over-react.  This, in turn, could undermine national power and, if we follow Doran's single dynamic, economic growth as well.

We would expect the tit-for-tat on trade to continue in the coming week. The increase in trade shots across the bows of the world's leading economies has sparked concerns about global growth, a concern that's likely to diminish demand. Meanwhile, the latest OPEC survey from S&P Global Platts shows production from Saudi Arabia and other regional producers is more than enough to offset the real and potential loss in output from Iran, Libya and Venezuela. And on Saturday, restrictions on the flow of oil were eased when Saudi Aramco announced shipments through Bab-el-Mandeb Strait near Yemen will resume "with immediate effect."

With its healthy appetite for oil, China targeting Trump's strategy of energy dominance will open a new phase in the brewing trade war. We're also mindful of the steady drums of war in the Persian Gulf as Iran stands pat on its determination to protect its interests and the nuclear deal that lets its oil flow. The week ahead may be a little quiet, though keep watching for clues in second quarter earnings. With tariffs and trade taking the headlines, we're pointing out Tuesday's earnings report from Plains All American Pipeline. On Thursday, Japan releases its annualized GDP and on Friday, we got a look at the U.S. Consumer Price Index.

For the week of March 21, when Trump announced a plan to impose tariffs on $50 billion worth of Chinese goods, the price for Brent crude oil lost 2.6 percent. Based on that, we're issuing an Orange alert for this week, but think it may be a bit on the pale side as oil seems rather range bound still. Expect tailwinds if U.S. inventory reports show a draw on crude and headwinds should the trade war escalate further.