We’re seeing several dramatic changes in Argentina, Ukraine, the Middle East, Canada, and Venezuela:
Argentina’s new president, Javier Milei, was sworn in and promised deep spending cuts. He promised to avoid pursuing vendettas, and said he would welcome “with open arms” anyone who shared his vision of rebuilding Argentina under a new social contract where “the state does not direct our lives” but instead “looks after our rights.” The Argentina business community has welcomed Mr. Milei. As the new president took his oath of office, the legislature shouted, “Freedom!” But former Argentine President Fernandez de Kirchner raised her middle finger to Mr. Milei’s supporters as she entered into the legislature for the swearing in ceremony.
The first decisive action by Mr. Milei is that his government devalued the Argentina peso by 54 percent on Tuesday. The central bank will continue to devalue the Argentina peso by 2 percent per month. Mr. Milei also announced massive spending cuts to curb government spending to 2.9 percent of its GDP. These austerity measures were praised by the International Monetary Fund, which in the past has often had to rescue Argentina.
In Ukraine, President Volodymyr Zelensky visited Washington, D.C., after attending Mr. Milei’s inauguration in Argentina. Clearly, he is looking for more U.S. aid, since Congress has become wary of further aid to Ukraine due to growing concerns about the theft of U.S. aid. The Biden administration wants to provide Ukraine, Israel, and other national security interests with an additional $110 billion in aid, but Republicans in Congress are insisting on improving U.S. border security, too, before passing additional international aid.
In addition, the U.S. military has refused to be audited by an inspector general regarding its Ukraine aid, despite a bipartisan Senate request. As a result, Mr. Zelensky will likely be disappointed and may be forced to agree to a temporary ceasefire, even though Russia may not accept a long-term ceasefire agreement.
Likewise, the European Union cannot agree on a $54 billion aid package to Ukraine, so both American and EU funding for Ukraine seem in jeopardy. To appease Ukraine, the EU agreed to start membership talks with Ukraine. EU negotiations typically take years and could be derailed at any time along the way. Also, a country cannot join the EU unless its borders are defined, so Ukraine may have to forfeit some of its eastern and southern land to Russia. Clearly, Ukraine is desperate, so its future remains uncertain.
Turning to the Middle East, there have now been over 100 attacks on U.S. military facilities and ships in the region around Israel since the initial Hamas attack on Oct. 7. The Iran-backed Houthi rebels in Yemen have been aggressive, trying to hit the USS Carney and USS Mason. Clearly, the United States will have to respond decisively, otherwise they are just encouraging more attacks on U.S. assets by Iran’s proxies.
COP28 wound down in Dubai with attendees struggling for days to debate the wording of a joint statement. Extremists, including Pope Francis, call for a complete ban on fossil fuels, but big emerging market economies, such as Brazil, China, and India, continue to emit more carbon dioxide and seem addicted to fossil fuels. As a result, a “watered down” COP28 draft called for “reducing consumption and production of fossil fuels.” This compromise is due to the fossil fuel industry dominating the annual climate conference, which is frustrating for U.S. climate envoy John Kerry, Al Gore, and others critical of the energy industry.
Furthermore, the OPEC+ countries at COP28, led by Saudi Arabia, refuse to sign any phase-out of fossil fuels. As a result, the final COP28 joint statement merely said that countries will transition away from fossil fuels in a “just and orderly” fashion—two key words—because as long as fossil fuels are cheaper than green alternatives, any transition will be slow, taking longer than most of our lifetimes.
Canada has said it will impose a cap-and-trade system to curb emissions on its domestic oil and natural gas industry. Specifically, Canada’s “draft framework” (to be finalized in 2025) will allow oil and gas production output to be capped at a level of 35–38 percent below 2019 levels, beginning in 2030. The government will then keep lowering allowances in stages until the industry reaches net zero by 2050.
I think it is safe to say that Canadian Prime Minister Justin Trudeau is not very popular in energy-rich Alberta, so when the next election is declared, Alberta and other western provinces will fiercely oppose Trudeau’s party. Canada is also shrinking in population, as many of its citizens move to other countries. Immigrants to Canada have also complained about the cost of living and are increasingly leaving Canada.
In other energy news, Ford cut its 2024 production targets for its F-150 Lightening electric vehicle (EV) to 1,600 per week, down from its previous plan to make 3,200 EVs per week at its plant in Dearborn, Michigan. The company also reduced the production of its Mach-e in Mexico, and downsized its new Michigan battery plant by approximately 50 percent. Ford’s proposed battery plant in Kentucky is now at half production. In a statement, Ford said, “We will continue to match production to customer demand.”
The Energy Information Administration (EIA) reported on Wednesday that crude oil inventories declined by 4.3 million barrels in the latest week, which is much larger than the consensus estimate of a 2.7 million barrel decline. Gasoline inventories rose by 400,000 barrels and distillates (diesel, heating oil, jet fuel) inventories rose by 1.5 million barrels in the latest week, so the prices at the pump are expected to remain low for the foreseeable future. Normally, the Strategic Petroleum Reserve (SPR) should be refilled in the winter months, when crude oil prices are seasonally low, but the federal budget battles are not allocating sufficient money to significantly refill the SPR after it was depleted by 40 percent before the midterm elections.
Venezuelan President Nicolas Maduro and Guyanan President Irfaan Ali met on Thursday, and both counties agreed to avoid using arms against each other as talks continued. Their next meeting will be in Brazil within two months. Mr. Ali said that major oil companies operating in Guyana’s waters were “moving ahead aggressively” with their production plans. Guyana’s government said it would award new offshore oil blocks by the end of the year. Mr. Maduro said some of those blocks are in waters belonging to Venezuela. Clearly, Venezuela seeks Guyana’s crude oil revenue, so the Brazilian round of talks will be interesting.
In closing, I noticed that the Securities and Exchange Commission (SEC) is now asking investment advisers how they utilize, and oversee, artificial intelligence (AI). Specifically, the SEC wants information on algorithmic models as well as marketing materials. SEC Chairman Gary Gensler has repeatedly warned that AI could lead to a financial crisis, create instability and “drive us off an inadvertent cliff.” Hmmm ... I suspect that Mr. Gensler is worried that many AI models do not properly account for the fact that market liquidity can disappear, so he may be rightly concerned that AI models may try to sell stocks when there are few or minimal buyers, which could trigger a flash crash.
I would concur with his concerns, and we have written about this danger in the past—with or without AI, due to high-frequency trading (HFT). My associate Jason Bodner has written two or three special white papers addressing this risk, but the investment lesson is that markets generally bounce back after a “flash crash,” so they can provide buying opportunities with no long-term damage during a strong bull market.
