The Market’s Blind Spot: Energy‑Driven Inflation in a World Beyond Gravity

Good Morning Ladies and Gentlemen

“What started as an event a year ago became a pattern, became a trend, and is now a certain trend that can be extrapolated.”

Peter Atwater

The Greeks and Spartans inflicted substantial losses on the Persians, who, under King Xerxes, held advantages in both numbers and weaponry. The Battle of Thermopylae, fought in 480 BC, marked a pivotal moment in the Greco-Persian Wars. It took place at the narrow pass of Thermopylae, where the invading Achaemenid Persian Empire, led by Xerxes I, faced a coalition of Greek forces commanded by King Leonidas I of Sparta. This relatively small contingent of Greek troops, often reported to comprise around 7,000 soldiers, including approximately 300 Spartans, effectively utilised the terrain to obstruct the far larger Persian army, blocking the primary route into central Greece. The fierce resistance lasted several days and was characterised by three days of intense fighting, occurring simultaneously with naval engagements at Artemisium. Ultimately, the Greeks were outflanked, and their rear guard was overwhelmed. Nonetheless, their defence has become a powerful symbol of discipline, sacrifice, and resistance against overwhelming odds. Today, we seem to witness a similar struggle, with the roles reversed, as the Persians assume the Spartans’ position.

Inflation

According to Bank of America’s Commodity Inflation Trendspotter for food and beverage companies, input costs experienced a significant surge in March, climbing 373 basis points to 7.9% year-on-year, up from 4.2% in February and 3.6% in January. This notable increase was primarily driven by rising prices for diesel and heating oil. Considering that we have not yet fully experienced the impact of escalating costs for plastics and fertilisers, I am curious about how the upcoming figures for April, May, and June will unfold. In my view, this situation illustrates a sequential trend and a layering effect, with rising fertiliser costs and other factors, exacerbated by increasing fuel expenses.

Buying the Dip

The phenomenon of „buying on the dip“ has fostered a herd mentality that tends to move uniformly in one direction. Under the current U.S. administration, this has evolved into a form of blind adherence to TACO. Peter Atwater from Financial Insights observes that what started as an isolated occurrence a year ago has now developed into a consistent pattern, solidifying into a trend that can be confidently projected into the future. The confidence in the TACO trade has become so pronounced that guidance on maximising financial returns from it is readily available from ChatGPT. This automated buy-the-dip behaviour appears to be linked to a growing dependence on AI. It’s clear that the inclination to buy continuously without reevaluating the dip has almost become instinctual, diverging from the conditioned responses of previous generations.

Conclusion

The concept of „buying on the dip“ may not align with fundamental investment principles, yet it seems to yield positive short-term results. I assert that in the long run, both speculators and investors may ultimately face repercussions for this strategy. However, such consequences may not manifest in the immediate future, allowing this practice to continue for the time being, leaving markets in a state that appears detached from economic gravity, buoyed by liquidity, low interest rates, and confidence in political and central bank interventions. Yet, energy, the most fundamental input into economic activity, is reasserting itself as a critical constraint. Unlike demand-driven inflation, energy-driven inflation stems from physical scarcity, underinvestment, geopolitical fragmentation, and increasing system complexity. Normally, it cannot be resolved through monetary policy or unqualified social media posts alone. Despite this, markets continue to view the current energy shock as transitory, underestimating its long-term effects on growth, margins, and productivity. This disconnect underscores the limitations of today’s market participants’ financial abstractions. While financial markets may currently appear to function independently of gravitational constraints, the real economy operates on different principles. Ultimately, a reconciliation between these two domains is necessary and, I assume, will happen.

Ladies and Gentlemen

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I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

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