A spike in energy prices should really prompt the Fed to cut rates, says Ironsides' Barry Knapp
Speakers
Joe Kernen — Host, CNBC
— CNBC Squawk Box co-anchor
Summary
- The "Petro-Dollar" Correlation Flip: Historically, the US Dollar fell when oil prices rose. Now, because the US is a net energy exporter, the Dollar and Oil rise together. This creates a "double whammy" crisis for net importers like Europe, Japan, and Korea (weak currency + expensive energy).
- Fed Policy Thesis: Knapp argues the energy spike is a "supply shock" acting as a tax on consumers, not demand-driven inflation. Therefore, the Fed should cut rates to support growth, not hike/hold to fight inflation.
- The "Warsh/Bessant" Plan: Knapp predicts a policy shift involving aggressive rate cuts (to 3%), yield curve steepening, and bank deregulation (the "Bowman Plan"). This is specifically bullish for the private sector and small banks.
- Growth Outlook: Consumption is already slowing (goods consumption growth dropped from 5% to 0%). The energy spike will further dampen demand, making it a disinflationary event in the medium term.
Trade Ideas
"Europe and Asia have a much bigger problem with energy than we do... Korean equities, Japanese equities got absolutely hammered... Japanese autos in particular led the weakness... they're all short energy." Japan and Korea are net energy importers. When Oil rises *and* the Dollar rises (the currency oil is priced in), their costs explode while their currencies devalue. This crushes margins for heavy manufacturers like Toyota (TM) and Honda (HMC) and hurts the broader indices (EWJ/EWY). Short exposure to Asian energy importers. A sudden drop in the US Dollar or a ceasefire reducing oil prices would reverse this pressure.
Barry Knapp
Managing Partner, Ironsides Macroeconomics
"Policy is... at least 50 basis points too tight for small banks... You need to steepen the yield curve... implement Bowman's bank deregulatory plan... I do expect it." Knapp believes the "Warsh/Bessant" plan will be implemented: Fed cuts rates to steepen the curve + deregulation. Regional Banks (KRE) are currently stifled by an inverted curve and regulation; this specific policy mix is the "unlock" for their profitability and lending ability. Long Regional Banks as a play on the "Warsh/Bessant" policy pivot. If the Fed remains hawkish due to headline inflation (ignoring the supply shock argument), small banks remain squeezed.
Barry Knapp
Managing Partner, Ironsides Macroeconomics
"I doubt very much if tens [10-year yields] will keep going up because this is a hit to growth... This is far more of a disinflationary shock than it is an inflation cause." The market is selling bonds (yields up) fearing inflation. Knapp argues the opposite: high energy prices act as a tax, killing consumer demand (which is already slowing). Lower growth leads to lower yields. Therefore, the sell-off in bonds is an opportunity to buy. Long Long-Duration Treasuries (betting on yields falling/stabilizing). If the market treats the energy spike as "sticky inflation" rather than a "growth tax," yields could push higher to 4.5%+.
Barry Knapp
Managing Partner, Ironsides Macroeconomics
"We're actually the biggest exporter of oil in the world... Dollar goes up and oil prices go up." The US is uniquely positioned as a beneficiary of energy spikes relative to the rest of the world. While consumers hurt, US Energy producers (XLE) and the commodity itself (USO) capture the upside of the geopolitical risk premium without the currency drag facing foreign producers. Long US Energy. Demand destruction (recession) eventually causing oil prices to collapse.
