 Hey, Aloha and welcome to Stan Energy Man here on Think Tech Hawaii. Stan Osserman, the one and only from Kailua, as obtrusive and obnoxious as I can be on any given day. I will probably maximize that today. I've already started off with a good email, but I'm probably going to pay for later. Anyway, today's show is really important. I can't overemphasize the importance and really pertinent to what's going on today. And I want to start off by saying there's a thing that I have from my flying background called a PIO, pilot induced oscillation. And it happens when you're flying along, especially when you're getting close to landing, and you're kind of on the edge of the envelope where your airplane's not all that stable. And you put in a flight control thing, it doesn't do what you want it to do, so you put in a little bit more, and then all of a sudden it takes hold, and then you overcorrect, and then you undercorrect, and you overcorrect, and pretty soon your airplane is doing this. Well, inflation is kind of that going on in your economy. So I've got my friend Dan Gowan here who happens to know quite a bit about economics and oil prices and bonds and markets and the software that controls what they do together. And he's going to try and make this something that we all understand. And it's really tied to energy because energy is tied to so much of what goes into your economy. The manufacturing, the resourcing of raw materials, the transportation of raw materials, the transportation of finished products, and even just going to the market to pick up your finished materials. They all require fuel, and they all require energy to manufacture or to move. So energy plays a huge role in potentially huge role in inflation. So Dan, take it away. Thank you, Stan. If I can get slide number one, please. The reason why Stan had me give this talk is one of my security clearance is I'm treasury certified, so I'm one of the few people that kind of qualified to even talk about this subject. I've got some intimate knowledge into the treasurer's computer system, the Fed reserve, so I have a good idea how a lot of it works, and I'm going to try to keep this as simple as I can and try to explain to people how it works. So can I get slide number two, please? Okay, what this is from, this is from Star Trek. It says season three, episode 17. So it's an original series, that which survives. Now I'm not going to go into the complete story. You want to go watch that version of Star Trek? It's a good story. Go watch it. Easy enough to find somebody where you can get online on the internet. Anyway, what the basic story is, an alien has sabotaged the ship and has burned the fuel regulator to the engine wide open. So the engine is uncontrollable and the speeds are getting faster, faster, faster. Now with Spock and the actor you see right there, that is actually James Duhan, which plays Lieutenant Commander Montgomery Scott. And what Spock has proposed is that Scotty insert a magnetic probe into the flow of fuel going into the engine. Now most of the public doesn't under one other really comprehend this, but for an engineer scientist, this image right here is absolutely terrifying. And here's the reason why. Imagine a four megaton hydrogen bomb, multiply that by a thousand. That's what's going into this engine every second. And this guy is going to stick his hand in. Okay. So that's why this is terrifying. Now, their choices are simply this. One, if they do nothing, some wide around work 15, the ship explodes, goes up like a supernova. Now he could risk cutting off that fuel supply. But just by doing that, he could risk blowing the ship up too. So either way, it's a game. And I go to slide number three. Okay. What there you've got. Notice the title says further reserved now. Now, what do you've got there on top that notes you have there on top? This is the United States bank note. No, it has the red treasury mark. That's an actual certified currency as defined according to the Constitution United States. What I'm going to tell you has to do with the legal distinction. Now, when it comes to trading securities on electronic formats, those securities could those securities either have to be bonds or stocks, they have to be certified securities. In other words, legally, because the Constitution and how it how it strictly defines currency, what money is in the United States, that we're not actually able to trade that top note on any electronic exchange. So you have to use that bottom thing. Now, on the top there says a Federal Reserve note. Technically, what a Federal Reserve note is, it's actually a bond. It's a bond. It's what they call zero coupon bond. It's a bond that pays no interest is what it does. Okay. But the point is I can trade that bond for other bonds. And it's important to understand that concept. Legally, that's the only thing that can be traded on electronic exchanges are those bonds and stocks that you cannot trade currency. And it has to do it because the Constitution is pretty strict on this subject, but they consider money. Okay. Can I go to slide number four, please? Okay. What's on that picture right there? That happened February 14, 1945. The gentleman in the center there that is King Abdul Aziz Saud of Saudi Arabia, to the right there that is President Franklin Delano Roosevelt, they're on board the USS Quincy on the Red Sea. That right there is the birth of the Petrodollar. What happened was these two major powers who are both those countries that, well, even today, they export large quantities of oil into the international market. What they decided to do is price all oil in dollars. Okay. Which really means that that oil is going to be priced in essentially US government bonds. Okay. Now this, as far as oil being priced in dollars, that has been true since 1945 all the way up until the year 2018. Something, I'll just keep this in back in mind, something happened in 2018 was rather important. And that was the first time oil was priced in non-dollars happened in, was March 26, 2018, Shanghai, China, it was priced in Yan, and that was between Iran and China. And today we have four countries that price oil in non-dollars and that happens to be Iran, Venezuela, Russia, and Oman. Oman joined this group last week. Right. Not only that, but if you go to Russia, try to buy natural gas or oil from the Russians, they'll make you convert that into either rubles, euros, or Chinese one. They will not accept dollars for their hydrocars. That's important to remember about. Can I go to slide number five, please? Okay. US oil production. Because oil is the primary commodity for the entire planet, everybody has to have oil for gasoline and diesel, especially since we use gasoline, diesel to transport any commodity around the planet. Truck train, Piper ship. Okay. Even the pipes require the burning natural gas to power the pumps. Okay. Truck train, Piper ship. Because of that, all commodities in the world are priced in dollars. Corn, wheat, pork bellies, turkey, chicken, you name it. It's all priced in dollars. Okay. So the whole world has to have dollars. That's what makes the dollar, the world's global reserve currency. Because if you're going to buy and sell those commodities in the international markets, you're dealing with dollars. Okay. You're going to have to convert your currency, two dollars to buy and sell in those commodities for the entire world. What that chart there shows you basically is just more proof what I was telling you about the US oil production that right now we're only producing between, what we got here, between 11 and 12 million barrels a day. Well, we're starting to drift back up. But for good check of this year, we're sort of underperforming, but that's all that really shows. Can I get slide number six? Okay. And that there says USA gasoline and storage. Okay. So there's a little bit of information about this slide, but I'm going to use this slide to explain about the dynamics between supply and demand. Okay. Well, first of all, we've had an uptick in the amount of gasoline, a storage here in America. The reason why that happened is because Joe Biden, President Biden took some oil out of strategic patrol reserve and sold it to some of the big oil companies and they refined it and turned it into gasoline because they've increased the amount of supply of gasoline that caused the prices to drop. So remember that concept and that is if you have a lot of something that drops the price, if you have a small amount of something, the prices increase, supply and demand. Okay. Those two things are linked together. Now, probably the best places I can give an example of how that dynamic works out in an economic system. It has to do with inflation versus deflation. When you have an economic system, you always want to have it. So where you have more demand than you have supply, that gives you a positive spin in your economic system and it can give you inflation and you use the interest rates on debt because money is actually loaned into existence. Okay. And so by raising or lowering the interest rates on that debt, you can control the rate of inflation. So by limiting the supply of your commodities, you've got more demand than supply and those interest rates and you use that to keep your economy in balance. Now, examples of when it gets out of balance, one of them had to do with the Great Depression, the reason why the depression occurred. During the 1920s, a lot of manufacturers entity, business entities went after and they borrowed a lot of money and they used that money to build a lot of manufacturing capacity. So when the 29-stop market crash happened, all this demand crashed because people lost their jobs, they couldn't consume as much so far. But you had all this manufacturing capacity tied to all these debts and because you had all this and so that depressed the prices of what they were producing and they could just make barely make payments on this debt, they were dragging around and all of that, but they drug this debt around for about 10 years. What broke the cycle finally was at the beginning of World War II, President Roosevelt, when he had the War Powers Act, he went out there and shut down a bunch of these factories and liquidated all that bad debt. And so when he did that, that brought the economy back into balance between supply and demand and then he was able to use that to rev the manufacturing engine back up and get us through World War II. And that led to the economic recover right through the 50s and the 50s were actually a pretty good economic time for the United States, but it goes back to understanding that relationship between supply and demand and that's just some basic understandings in economics and how that works. Now as far as inflation, let me give you some examples. If you don't have inflation and control how it can whip your economic system apart. So for example, right now in the Middle East, they're completely sold out of your rear. Your rear is fertilized if you didn't know that. And what's happened is because the natural gas prices this summer has been steadily going up and if you listened to some of our previous talks, you know that a major component for making ammonia is natural gas and they take ammonia and they can turn that into urea, which is basically take some more carbon monoxide, some molecules of money attached together and so you make urea. But what's happened is, is people out there are seeing the prices, the natural gas steadily going up. So what they did is they went and bought up all their urea they could, all the fertilizer they could, before the prices went higher. That's called porting. And you'll find that whenever people are noticing that, for example, let's say you had jar of baby food, let's say this week I buy it for $1, maybe three weeks from now I buy another jar of baby food, then it's $2. Three more weeks after that, I buy another jar of baby food, it's $3. What happens is most people get in their mind, well, the prices are going up. I have no idea how high the price is going to be three weeks, one month, two months out. What do they do? They start hoarding, hoarding as much as they can. What happens at the manufacturer, when the manufacturer sees that all my baby food is sold at this place, what they do, they only have a certain amount of manufacturing capacity. When they build manufacturing capacity, they have to go borrow the money to build the factory. So there's a limit there. What they do is they start raising the prices and because they start raising the prices, the people, your consumers, they start hoarding more of that stuff and then the manufacturer, he raises the prices even higher. So you get this feedback loop, it starts flipping and it's between that manufacturer and the consumer, between the supply and demand and that's how the inflation starts feeding on itself. As an example right now, lithium carbonate, the prices are sky high and if you order any lithium carbonate for making some of your lithium ion batteries, you'll have to wait eight months before they'll deliver it. Before you can order lithium carbonate and they deliver between 30 and 90 days. Now you got to wait eight months and it's because they still haven't mined the stuff out of the ground and what they've done is they've raided the prices because people are paying those prices because they're hoarding the lithium is what's going on. Vegetable oil, the price of vegetable oil is already doubled in the last year. This is at the wholesale level. The price of potatoes have already doubled, again at the wholesale level. The price of soybeans have already doubled, again at the wholesale level. The price of lumber, lumber crashed last July, guess what? They recovered all the costs and all of that but the price of levels doubled since last year at the wholesale level. So we have inflation in our economic system and it's feeding on itself. There's a feedback loop there. Any questions so far Stan? Now just the connection again back to energy, you know the lithium batteries connected to energy. The moving of food and the tying of so many commodities to transportation goes back to energy. You can't afford to get this kind of instability in the energy sector because it has a multiplying factor through the rest of the commodities that are traded. Well also recognize we already pointed out there's a length between oil and the dollar directly. There's a direct connection that is the master resource and since it is sold throughout the world in dollars therefore you have to have dollars. You got money connected to the master resource which is energy. You get high energy prices, it'll feed back into your financial system. If you don't get this thing under control, it can tear your economic system apart. We'll talk about that. So there's a direct connection between the money and oil and energy directly and it's wired directly into the the foundation of the system. Can we go to slide number seven please? Okay this has to do with yield curve what's called a positive yield curve what that is. Okay so what you've got there on the screen that has to do with the United States trader is and what the idea behind a positive yield curve is simply this and that is your short duration bonds have a low interest rate on them and longer duration bonds have a higher interest rate on them and it has to do with risk. If you're going to buy one of these U.S. government bonds you're going to hold on for 30 years right you're going to want to be paid a higher interest rate for your risk. Now understanding U.S. government bond is essentially risk-free debt because it's being issued by a government the U.S. government so that right there what I'm actually showing you that is the real reserve currency the world is using these bonds to trade for those commodities okay they don't necessarily care about what the yield is on them just as long as it's a positive yield but they're actually trading these things for those commodities for your portbillies for your oil for everything okay. Now the thing about bonds is the price is that the price of your bond is inverse to the interest rate on them what that means is if the price if the price of your bond is high the interest rates are low but if the price in your bond is low then the interest rates are high. These bonds are sold at auction so basically the government wants to get the most money as it can so they want the prices to go out and they're trying to convince you to pay them more money for their bonds. Now if there's a lot of demand for the bonds the prices will be high and the government only has to pay a little interest rate on okay so that's high demand pay a little interest rate but if nobody wants those bonds what the government has to do to entice you to buy the bond is raise the interest rates on those bonds okay so remember the price of the bond is inverse to to the interest on that bond they go back and forth right now the Fed reserve controls the bond market here's how they do they do it in three different ways and contrary to popular belief these three different ways are really nothing new to the Fed reserve the truth is all three of these things that they have have been in the Fed reserve act since 1913 the first one is is they well first of all the Fed reserve is actually a private institution the employees are government employees but the Fed reserve is actually a private institutions the people that own them are actually the member banks jp morgan's city bank they actually they own their own their Fed reserve so it's a public employees but private institutions what that means you can subpoena the employees and get them to talk to congress but if you try to audit the Fed you're going to go through a court because technically that is a private corporation now how they control it is the the Fed reserve controls the interest rates how the banks when the banks loan each other money the Fed reserve controls those interest rates that's called the interbate banking rate and that's really down in the short end of the curve now on the upper end of the curve how they controlled us with QE and QT quantitative easing quantitative tightening what quantitative easing is is where the Fed reserve goes into the bond market and they start buying up all the bonds when they buy up all the bonds what happens when they buy up all the bonds the prices the bonds go up and the interest rates go down that's how the Fed reserve is able to force the interest rates go down by buying up all the bonds out of the market now when it comes to quantitative tightening that's where the Fed reserve takes the bonds on their balance sheet and they sell them into the market in other words they flood the market with bonds okay when they flood the market with bonds that causes the prices on those bonds to fall with the interest rates to go up okay so it's important to understand that concept so QE is they're buying up all the bonds and forces the interest rates down QT is where they sell them into the market right and that causes the interest rates to go up okay when you have the Federal Reserve making those bond purchases or sales is that really the big banks making those purchases and sales well basically when you go to the bond auction the primary dealers all those big banks they're the ones at the bond auction you and I are you and I buy those bonds from the banks but the banks are at the auction they're buying them directly from the treasure right and the banks so when they buy them out the treasury they can turn around and sell them directly to the Federal Reserve basically the Federal Reserve says hey I want these bonds the bank buys it gives the Federal Reserve and the Federal Reserve gives the bank something called they're called bank reserves that's what they're called so technically the Federal Reserve is not actually printing money but they're actually money is actually loaned into existence the Federal Reserve is a bank that has the ability to lend unlimited amounts of money they don't print money they lend money into existence it's sort of like when you create a mortgage you put down your 10% your banker creates a mortgage backed security and he loans money into existence that money doesn't exist it's actually created by that loan and then that loan turns into a mortgage backed security which it gets sold out in the market so money is lend loaned into existence okay if I can get you to page number eight so yeah okay yield curve inversion equals recession what happens with a yield curve version that's when the Federal Reserve decides they're going to tighten monetary conditions they can do that in two ways one is is they can raise the interest rates on those inner bank bank loans and that causes the yields and the short-term bonds to be higher than longer ones okay the other way they can do it is stop buying bonds using QE that might do it the other way it can do it they can start selling bonds into the market and that could do it now give me an example what yield curve conversion looks like let's say I had two-year bonds have paid 5% but yet the 20-year bond is only paying 1.5% that means the shorter term bonds have a higher interest rate than the shorter term ones and if you look at that chart right there if I can get you to show number eight again see that pink area there whenever the that's when those yield curve conversions happen notice 1929 we had a yield curve conversion all right that causes a crash here's how that works when you're talking about us government bonds remember this is same people that make the money so this is risk-free debt now whenever the government does QE basically they buy up all the government bonds remember they bought up all the risk-free debt that's okay and they've dropped the interest rate and what that does that forces everybody because you I can't afford to own a bond that pays me no interest because there's always still limited inflation or whatever so it forces everybody to go out and buy up all the stocks all the corporate bonds is what happens okay now whenever the government does this QE inversion thing what happens is everybody sells off all their stocks and their bonds to rush toward that two-year bond that's paying 5% okay so that's how you get a stock market sell off in the process but also remember all the other things that are tied to those bonds like well for example let's see oil okay so if you have this yield curve conversion right that that has a lot of other knock-on effects to it one of them has to do with commodities whenever you get these yield curve conversions one of the things that happens I just described how the stock market sells off it what happens overseas in other countries depending on what interest rates look right look around other government bonds what'll happen is it'll trigger a sell-off and other stock markets and bond markets around the world people will trade their currencies for the dollar that means their currency drops in value the dollar goes up in value just so they can buy those bonds okay well whenever that happens that means it takes fewer dollars to buy a barrel of oil that means oil could go from $80 a barrel drop down to 10 bucks right hey good for the consumer inexpensive oil right yeah bad for the producer because when prices drop like that the guy that's running the oil well or the refinery he stops making oil he turns the tap off or the guy running the refinery he turns the refinery up because he's losing money selling you fuel at that price and that'll happen because you got a crash in the commodities market and that's because the dollar went too fast up in value right fewer dollars to buy the same oil but yet it doesn't change the cost of producing end products it's a little bit complex but if you think about what I just said it'll make a lot of sense okay if I can get to page number nine okay so we go back to that thing here says the needle jumped in the magnetic ball okay so in this case here um the guy there is envisioned that is Jerome Powell and he's trying to cut off QE and what happened when he started inserting that magnetic probe into the engine then the needle in the magnetic bottle jumped now the Federal Reserve um since 2019 they've been pumping $120 billion a month into the markets of QE that's $80 billion with the bonds and $40 billion with the mortgages the Federal Reserve Blackrock has been going around the United States buying up all single family houses um and Blackrock's turning those into mortgages back securities and the Federal Reserve's been buying those so right now we have a housing bubble it's bigger than the 2008 bubble uh 95 percent of Americans cannot afford to buy a house and the culprit is actually the Federal Reserve the Federal Reserve is trying to get the housing market from from collapsing okay but they've created a bigger problem in the process the other problem is is our stock market um and we'll talk a little about this later there's something called the the Buffett indicator that's Warren Buffett right you go through and look it up on Google well the Buffett indicator is a valuation indicator right and it's a really good indicator to tell you when you're going to have a stock market crash but right now the Buffett indicator the reading on the Buffett indicator is 200 well and 11 percent okay what that means is gentlemen ladies and gentlemen we're doing work 15 in our in our starship the sub ride around 16 or 17 she's going to blow up okay so I'm just I'm going to give you your two minute warning now yep yep yep okay go to number 10 okay January January 3rd uh that was January 3rd there was a spike in the 10 year remember Jerome Powell did that QE started cutting back and buying those bonds we got a jump in the the 10 year bond 1.7 percent uh to give you an idea what happened last week the 30 year bond lost 9.35 percent of its value the 10 year bond lost 4.24 percent of its value now you didn't see that big of a jump in the stock market and here's the reason why there's a type of bond called TIPS it's um it's an inflation protected bond is what it is well what's happened is is the Federal Reserve has bought up 25 percent of the TIPS market to keep the the rate on those bonds from going up and the reason why is to so the federal government doesn't have to pay as much on those bonds because they already know the rate of inflation side the other reason why the Federal Reserve did that is because all the ETFs on the stock market are tied to the TIPS index and that keeps the stock market for blowing up so if you want to know why the route in the bond market that happened last week did blow up the stock did not blow up the stock market is because the Federal Reserve owns most of the TIPS bond market because they know all those ETF funds that's computer traded funds exchange traded funds are tied directly back to that TIPS bond and oh by the way the 10 year bond is tied to the mortgages right just to understand that uh the last page late number 11 please okay what that is that's called the golden zone you see that line right there that's a relationship between the 10 year bond and the CPI the the December reading on the November rate of inflation was 6.8 what that relationship there shows you all the dots you see there that's where the Federal Reserve has set policy in the past and that's where the 10 year rate ended up and if you notice that red area that's where Jerome's been setting the interest rates before now with a CPI a 6.8 what that means is the interest rates on the 10 year bond should be 7.8 but it's not it's way below where it should be so basically where the Federal Reserve and the Treasury are at is one if they do nothing our economy is going to rip itself apart it'll look like Venezuela or Turkey not only that but probably the world number two Jerome Powell cutting back in the QE he could blow it up just by doing the QE because the sensitive the bond market tried directly back to the stock market and our housing market so that's the the situation we're at right now that is our starship is barreling out of control and if Jerome or Janet Yon do not slow this thing down we're going to have bigger problems than we ever imagined that's that's all I got to say oh that was econ 606 in 30 minutes yes um I mean the economies are complicated um thing I'd like to also point out that probably very few of the banks in in New York or the big banks they don't really make anything they just handle money and you've just kind of gone through a litany of how the interest rates and making money on other people's money is a business it's a big business it's a huge business it has huge implications and energy is also a big business with huge implications tied directly into what the Fed does yeah and that's why I wanted to have this show today because I think it's really important and I hope I hope get a lot of people looking at it and understanding it so that we don't we don't overreact to what's going on in our multi megaton engine and we start settling things out well what I what I try to point out Stan is the fuel for the dollars oil you have problems with oil that causes problems with the entire world economy now I'm not what I'm trying to tell everybody especially if we know we you and I stand we've talked about this we have resource problems with oil and those things are not getting any better when you look at what the new stuff they're finding and the old fields are depleting that's going to continue to have a problem with the world's economy we really need to diversify and this thing we're dealing with right now I just described how I saw how sensitive it was I mean a 30-year bond lost almost 10 percent of its value just last week how many trillions was that Stan that's how sensitive it is yeah I need to do something here guys yeah so we've never had a more important time for saying an intelligent government and policy and it's not looking good in the DC inside the Beltway right now as far as I'm concerned so anyway Dan thank you so much for really a crash course in inflation and connecting it back to the energy world because that's what this show is about is energy yeah and it's truly an important commodity worldwide and now I think people understand why it's even more important and you can't just be you know making radical changes in your oil policy and and your energy policy without some serious repercussions yeah well hopefully everybody will go back and watch that Star Trek episode and when you watch it you'll really appreciate what I just described this is really what Jerome Powell's I know he's sweating bullets right now I can tell you I know he's yeah well Dan thanks for being on the show again today and I'm sure we're gonna have another couple economic talks down in the in the future and I want to have you on at least once a month to give us a reality check on energy so thanks again for being here today and for everybody out there in think tech land we'll see you next week Tuesday and just as a teaser on the 25th of this month I have the CEO of plug power coming on to talk to us about his company that's doing gangbusters around the world in hydrogen aloha