The markets have been flat over the last week. The same issues continue - inflation, interest rates, and all that. There’s nothing new to add here. Recent economic adversities however, have been resulting in some strange economic behaviour. Presenting two of these stories from last week instead of boring you with the same print.
Inflation in the US is real bad right now. With prices at a 40-year high, everything is turning expensive. The Fed has been getting aggressive at increasing rates to cool the economy down, and tame inflation. The whole objective is simple - increase rates, discourage borrowing/spending, encourage saving, cool down demand and prices. But in the process, demand falls, so do corporate profits, and the stock markets.
In short, inflation hurts, and so does fighting it. That’s the harsh reality of how it works.
And then came a very benevolent California. California is more expensive than the rest of the country. Take gas (petrol) for example. While the average in the US is US$ 5 per gallon, it goes as high as US$7 in California.
California decided on helping its population regain spending power. It will start sending out one-time checks of up to US$ 1,050. Logic - people can use this money to spend more. Why this defies logic? By giving people free money, you encourage spending, and let inflation further increase. In a free market, prices of goods and services are determined by demand and supply. Higher the demand for something, the more people are willing to pay for it, and the more they are willing to pay, the more prices will rise.
So while the Fed increases rates to crunch liquidity, California decides to pump liquidity by giving out free money! Essentially, fuel inflation to save from inflation!
A Failed Arbitrage
Ever since Russia invaded Ukraine, the West has been slapping sanctions at Russia to crunch its economy. In the process, the US banned oil imports from Russia - the US has an oil-surplus and it can afford to do so. The EU followed, but in a gradual and phased manner - it’s not as privileged as the US, it depends on Russia for oil.
Russia was then selling oil at a discount to friends and neutral countries like China, India and Turkey. Offer cheaper oil at a time when prices are soaring, and these countries started snapping up Russian oil.
In this scenario, domestic producers in India found it attractive to sell internationally (export at higher prices). Some refiners even started to buy more Russian crude (cheaper), and continued refining it and exporting refined products at much higher prices. The result of global oil inflation and cheap (relatively) Russian oil was a huge and abnormal gain for Indian oil producers and refiners (a windfall).
So the government stepped in, and imposed additional tax on profits of oil and gas companies. Export of petrol, diesel and ATF now fetches higher taxes. The government’s logic? India is an oil-importing country, and it’s paying much higher than before to get oil in. If companies benefit because of a disparity between domestic (or less expensive imports) and international prices, the government might as well take a share from it!