The Geopolitical Energy and Risk Monitoring Report

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Welcome to The GERM Report by Dan Graeber, a commentary on the intersection between geopolitical events and the price of oil. GERM stands for Geopolitical Energy and Risk Monitoring. Our indicator is based on the expected price volatility by the end of the current trading week.

Risk level: Orange

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


  • In a market downturn, negativity breeds negativity.
  • Gartman: We may already be in a recession.
  • Social instability is leading to political instability.

Geopolitical conflict is fading into the background as economic conflict intensifies. Though the Trump administration backed away from additional tariffs on Chinese goods, the damage has already been done. Economists with the Organization of Petroleum Exporting Countries on Friday said risks to growth are plentiful, from trade-related issues to Brexit and the general slowdown in global manufacturing. The World Trade Organization, for its part, said global trade was well below its baseline level and will likely stay that way for the next few months. Meanwhile, the University of Michigan reported that consumer confidence in the world’s leading economy hit its low mark for the year. Equities remain volatile and Brent crude oil is down 10 percent on the month. Contagion has clearly set in as the perception that recession is imminent grows. And from geopolitical affairs to the markets, as perception goes, so goes the world.

Uncertainty in the market breeds volatility and that was clearly the case last week for Brent. The benchmark spiked 4.7 percent on Tuesday, only to have that wiped out over the next two days. In the end, and despite the wild swings, it was a very calm week, with Brent closing up 0.2 percent to $58.69, perhaps the quietest week since The GERM Report’s inception.

The spread between two-year and 10-year Treasury notes inverted last week, signaling loudly that an economic downturn may be coming. OPEC economists on Friday said global risks from trade and nationalism are spreading, and emerging economies such as Argentina are starting to spiral out of control. Dennis Gartman, editor and publisher of The Gartman Letter, told Bloomberg last week that it’s likely that the US economy sank into recession in early summer, but “we just don’t know it.” Gartman said that economic data are reflective of the prelude to the Great Recession, but without the banking and housing crises. And now, the University of Michigan shows that perception is growing. Consumers, the report found, felt they may need to cut back on spending because of their expectations of a possible recession. If it seems like the economy is faltering, then it probably is.

But apart from the collapse of key segments of the economy like housing and banking, what’s different between now and the late aughts is how perceptions are influenced. The microblogging platform Twitter went live on July 2006, just as the global economy was crashing. Its ability to influence now, however, is far greater than it was at its birth. What makes social networking work like it does is that it makes both information and disinformation promiscuous – it gets around. It also shapes perceptions. Neil Postman, one of the leading thinkers in communications, said media technology not only adds to a culture – it transforms it. Now consider something like confirmation bias and in-group tendencies. People look for confirmation of existing views and tend to engage with only others that share those views. Challenging those views is akin to a form of social suicide, where the perception of self would be destroyed by fracturing the very notions that make up identity. Add to this the notion that negativity breeds negativity because of the heightened emotions that bad news creates. This, in turn, induces opinion extremity, the idea that the more a certain notion is perpetuated, the more likely that notion starts to become extreme. If it seems like the economy is faltering, then it probably is. And given the influence of social media, once that perception gets baked in, not believing it becomes a form of social suicide. In the market, that leads to contagion, a situation where panic spreads.

In the global arena, the perception that things are not working out leads to an appetite for change. In the United States, the notion that the made-in-America liberal world order wasn’t bringing the expected gains has ushered in a period of nationalism and retreat. That perception is spreading, with governments from Brazil to Great Britain embracing leaders similar to President Trump. Under its current president, the United States has turned its back on the global free-trade mechanisms that created a general sense of political stability that endured more or less since the end of World War II. A Europe without the US economic and security umbrella is now struggling to find its identity. The UK, once the region’s offshore balancer, is leaving the European order, passing the mantle to Germany. And instead of working closer with a Berlin positioned to lead, Washington has instead threatened it with economic warfare. That leaves the European community with few options but to position themselves against, not with, the United States. On Sunday, the government of Gibraltar issued a statement on the US intervention in the detention of the Iranian-flagged Grace 1 oil tanker that can only be read as ‘mind your own business.’ The euro, meanwhile, is becoming more fashionable and the European community is looking for more and more ways to operate outside the US umbrella. Instead of Washington, the reins of leadership may rest in Berlin’s hands. But Germany too is faltering. The German economy shrank in the second quarter and its mighty manufacturing sector is in decline. The social well-being of citizens underpins political stability. An economic downturn, by that logic, implies political instability. The worse things look, the more resentful we become. When we become resentful, we’re unlikely to cooperate, leaving few things left to constrain the nationalistic tendencies and the return to the power politics that eventually led to global war. Or, perhaps, that’s just opinion extremity.

Data published Monday on consumer prices in the eurozone will test the determination of the European Central Bank and its rate policies given the expectation of a downturn. The producer price index in Germany is published Tuesday, with forecasts for the year-on-year change on the negative side. Minutes from the July meeting of the US Federal Reserve are published Wednesday, as is the treasure trove of data from the US energy sector. If the EIA reports another build in inventory, crude oil prices could go into a freefall. On Thursday, economic wonks will have all they can handle when the Fed reserve policy meetings begin in Jackson Hole. Also, be on alert for German manufacturing PMI for August, US jobless claims and consumer confidence in the European market, all on Thursday. And the week ends with new-home sales in the United States. We’ll see there if Gartman is right. Volatility last week would suggest a turning point is coming for Brent, though sell signals are still outnumbering the buy signals. Brent is closer to resistance than it is to support, so a floor is still far away. Expect volatility to continue, but less smoothing. An Orange alert is in place, with prices swinging by plus or minus 2 percent.