What The Fresh March Higher in Oil Means for World Markets

Energy

Summary:

Oil prices are up around 16% so far this year near $90 a barrel, with supply worries high given escalating Middle East tensions...

Oil prices are up around 16% so far this year near $90 a barrel, with supply worries high given escalating Middle East tensions and tit-for-tat attacks on energy infrastructure between Ukraine and Russia.

Investors are paying attention. After all, it was an energy price surge two years ago that helped drive inflation and interest rates higher on a scale not seen in decades. What The Fresh March Higher in Oil Means for World Markets_1

What The Fresh March Higher in Oil Means for World Markets_1

The International Monetary Fund on Tuesday described an "adverse scenario" in which an escalation of conflict in the Middle East would lead to a 15% jump in oil prices and higher shipping costs that would hike global inflation by about 0.7 percentage points.

The tightness in oil supplies, and higher prices, has been underpinned by oil producing group OPEC and other big oil producers curbing their output.

Morgan Stanley has lifted its third quarter Brent crude oil forecast by $4 per barrel to $94. With oil prices expected to stay high, we look at the fallout for world markets.

Inflation Watch

After U.S. inflation came in higher than expected for a third straight month in March, the spectre of inflation staying higher has returned with bets on interest rate cuts scaled back sharply.

Softening energy prices have been a principal driver of lower inflation expectations recently. Higher oil prices are seen as a threat to this trend.

A key market gauge of long-term euro zone inflation expectations, which generally track oil, on Tuesday hit its highest since December at 2.39%. The European Central Bank has a 2% inflation target. What The Fresh March Higher in Oil Means for World Markets_2

What The Fresh March Higher in Oil Means for World Markets_2

ECB chief Christine Lagarde said on Tuesday fresh turbulence in the Middle East had so far had little impact on commodity prices. Oil, while near recent highs, has eased a little this week.

Still, the ECB has said it is "very attentive" to the impact of oil, which can hurt economic growth and boost inflation.

Zurich Insurance Group chief markets strategist Guy Miller said economies can survive, and producers are reasonably happy, when oil is around $75-$95 a barrel.

"But were we to see this to break higher then, yes, that would be a concern both from a growth and inflation perspective," he said.

Go Energy Stocks

Energy stocks are a clear winner from higher oil prices. The S&P 500 oil index and European oil and gas stocks remain close to record highs.

U.S. oil stocks have jumped almost 13% so far this year, outperforming the broader S&P 500's 6% gain. What The Fresh March Higher in Oil Means for World Markets_3

What The Fresh March Higher in Oil Means for World Markets_3

Ed Yardeni, founder of Yardeni Research, said a rise in Brent crude to $100 in coming weeks was a possibility, recommending an "overweight" position on energy stocks.

Oil was last above $100 in 2022. It briefly spiked to around $139 after Russia invaded Ukraine, its highest since 2008.

"I believe you have to overweight energy as at least a shock absorber in your portfolio in the event that oil prices continue to go higher," said Yardeni.

Barclays head of European equity strategy Emmanuel Cau has had an overweight position on Europe's energy stocks since October, saying the sector tends to perform well in inflationary and stagflationary environments.

In contrast, Nordea CIO Kasper Elmgreen said he was negative on energy stocks because the costs associated with an energy transition were not correctly priced yet.

"They (energy firms) are going to have to carry a much higher burden for the drive to net zero, and that's not being reflected in the share price," said Elmgreen.

Robust Dollar

2024 kicked off with expectations the dollar would decline as inflation weakens and allows the Federal Reserve to start cutting rates.

Instead, the greenback is up 4.7% this year as rate-cut bets are slashed.

What The Fresh March Higher in Oil Means for World Markets_4

Higher oil prices could feed dollar strength.

Bank of America said that while it remained negative on the dollar over the medium term, elevated oil prices meant the U.S. currency had "upside risks".

That exacerbates pressure on economies such as Japan battling currency weakness, keeping traders nervy over possible intervention to support a yen languishing at 34-year lows.

"The yen and the euro will see their terms of trade worsen as energy prices rise. This implies they will be weaker if energy prices rise," said Mizuho Corporate Bank senior economist Colin Asher.

Fresh Em Pain

Higher for longer oil prices will also sting many emerging market economies, such as India and Turkey, that are net oil importers.

India's rupee hit record lows against the dollar this week. What The Fresh March Higher in Oil Means for World Markets_5

With oil priced in dollars, many importers are also exposed to higher prices caused by currency fluctuations.

Even in Nigeria, typically Africa's largest oil exporter, a plunging naira currency has hit government coffers due to capped gasoline pump prices and a lack of local oil refining.

Source: Yahoo

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Central Bank

Economic

The market is digesting both the latest geopolitical developments and the recent rally in oil prices as the countdown to the May 1 Fed meeting has begun. Compared to the start of 2024, fewer rate cuts are expected by the key central banks with the market also contemplating a non-negligible possibility of the Fed keeping its rates unchanged during 2024.

Fed and the ECB: divergent paths

The initial market expectations of around six rate cuts in 2024 for both the ECB and the Fed were quite puzzling considering the perceived health of these two economies. The economic divergence between the US and the euro area has since become more pronounced as Chinese growth continues to disappoint and despite some very tentative positive signs from the euro area business surveys.

The Fed is seen cutting its interest rates by 42bps in 2024, which translates to one full 25bps rate cut and a 68% chance for a second rate cut of similar magnitude. The first rate cut is priced for November, clearly reflecting the recent trend in US data releases. With growth expected to stay north of 2% for the first quarter of 2024 and inflation remaining elevated, there is a strong possibility that the first Fed rate cut could be pushed out even further. Also, the November elections are gradually coming into the picture, complicating the Fed's position.

On the flip side, the continued economic growth weakness and the sizeable easing in inflationary pressures in the euro area have opened the door to the market pricing in three ECB rate cuts of 25bps each in 2024. Market Continues to Price in a Plethora of Rate Cuts for 2024_1

Market Continues to Price in a Plethora of Rate Cuts for 2024_1

BoC: two rate cuts and room for more

The Bank of Canada is probably the most dovish central bank at this juncture. The significant progress made in inflation was acknowledged in the most recent BoC gathering with Governor Macklem talking about the need for further evidence of a sustainable easing inflation. When examining the domestic issues, especially the housing sector, one could say that the two rate cuts currently priced in are probably an underrepresentation of current situation and hence more rate cuts could be announced in 2024.

BoE, SNB, RBNZ: one rate cut and done for 2024?

These three diverse central banks are probably going to announce at least one rate cut in 2024. The UK continues to experience high inflation and a relatively low growth rate. Bank of England members are preparing for the much-touted rate cuts, but the threat of renewed inflationary pressures, on the back of the latest geopolitical developments supporting the recent oil price rally, is keeping them up at night.

The year started with the market expecting almost four rate cuts by the Reserve Bank of New Zealand in 2024. Similarly to other central banks, inflation is proving stickier even though recent data is pointing to a weakness in consumer spending. Somewhat surprisingly, the RBNZ maintained its hawkishness at the recent meeting and poured cold water of dovish expectations. The market expects only 33bps of easing in 2024.

The Swiss National Bank surprised the market with its March rate cut. The low inflation forecasts for both 2025 and 2026 could mean that the SNB is not done yet. Hence, the market is currently fully pricing in another 25bps rate cut by September with around 56% chance of one additional move by year-end.

RBA: could it keep rates unchanged for 2024?

The Reserve Bank of Australia was the last one to hike in 2023 and the market is only assigning a 64% probability for a 25bps rate cut in 2024. Such a move though could become even more improbable if China finally manages to return to growth, influencing its main trading partners and the commodity markets.

BoJ: the market wants more

The first rate hike since 2007 has opened the market's appetite for further rate moves, which matches Governor's Ueda current thinking. The market is pricing in at least another two 10bps rate hikes in 2024 with the current yen weakness, and its impact on imported inflation, potentially offering the Bank of Japan an excuse to do even more down the line. Market Continues to Price in a Plethora of Rate Cuts for 2024_2

Market Continues to Price in a Plethora of Rate Cuts for 2024_2

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ING

Economic

Forex

USD: FX to trade only on geopolitics today

It was reported overnight that Israel launched a retaliatory strike on the Iranian city of Isfahan. For now, it appears that Iranian media are downplaying the size of the attack, and reassured that nuclear facilities have not been affected. The news has had ramifications for different asset classes already, although the initial impact has partly been unwound in the early morning hours.

After spiking above $90/bbl, Brent is trading at $89 at the time of writing, while the Nikkei dropped to as much as 3.5% but has now trimmed losses to 2.4%. Equity futures point to a -0.5/-1.0% open across US and European main stock indices while US 10-year treasury yields briefly traded at 4.50% before rising back to 4.55%.

The FX market has mirrored the initial large impact and subsequent partial reversal observed across other asset classes. Safe havens are in demand, led by CHF, then JPY and the dollar, while antipodeans are the biggest underperformers. Markets will be monitoring today's headlines very closely, trying to gauge the risk of the Iran-Israel tensions spiralling into a fully-fledged conflict in the region.

If we see a further escalation, we think NZD, AUD, SEK and NOK could lead the losses in G10. The correlation of NOK and AUD with a potential spike in commodity prices is often overshadowed by the risk-sentiment factor. In the high-beta space, CAD should emerge as a relative outperformer, as it would benefit from the higher oil prices and its geographical distance, and also thanks to greater correlation with strong US data and USD.

The yen can benefit from a combined effect of lower rates and risk correction, as well as potential acceleration in the Bank of Japan tightening cycle if energy prices raise inflation concerns. The Swiss franc is also in a very good position to extend its rebound, particularly given its previous role as a hedge during the 2022 European energy crisis.

JPY and CHF could gain more than the dollar in a geopolitically-driven risk-off scenario, but the dollar may be able to hold on to gains more easily once some geopolitical risk is priced out. That is because markets have received greater incentives to turn structurally more bullish on the dollar of late.

A return to $100+ in oil prices may convince the Fed to throw in the towel on hopes of monetary easing for now, and a potentially magnified impact across EM currencies of geopolitical risk would fuel a substantial rotation back to the dollar. Some of the EM strength had been triggered by popular carry trades, which aren't only being unwound due to Middle East turmoil, but fundamentally as the Fed is on a diverging path from other dovish central banks.

Today, expect geopolitical news to dominate. The US calendar is incidentally empty, and the shift in the Fed narrative to a more hawkish stance is hardly surprising at this point. It remains to be seen, however, how far FOMC members want to push the narrative of potential hikes at this point.

The Philadelphia Fed Business Outlook survey – released yesterday - jumped to the highest in around two years, and while many other surveys are pointing to a less bright picture, the latest hard data has endorsed the few optimistic activity surveys, if anything. Risks remain skewed to a rally to 107.0 in DXY.

EUR: Middle East turmoil overshadows ECB factor

The euro isn't as exposed as higher-beta currencies to a potential escalation in the Middle East, although extending the dollar considerations above, substantially higher energy prices could lead to a more structural bearish stance on EUR/USD. While we have been highlighting how a much stronger terms of trade and economic-fundamental position of the euro compared to 2022 hardly points to EUR/USD parity at this stage, it is possible that markets price in a deterioration in economic conditions in the eurozone as a consequence of higher geopolitical risk.

When it comes to how the ECB decisions might feed into the FX impact, we can identify two main scenarios. If the Middle East situation spirals into a fully-fledged conflict, and there is a major correction in equities and big commodities rally, then a potential delay in ECB easing plans would hardly do much to support the euro. Remember how in 2022 the ECB was delivering large rate hikes, but the euro remained under pressure. In a second scenario, where geopolitical events fail to generate a major equity and commodity shock, then the ECB decision on whether to go ahead with rate cuts would have a much bigger say on EUR/USD direction.

While markets monitor closely how the situation evolves in the Middle East, the downside risks for EUR/USD have undoubtedly risen overnight, and the 1.0600 support may not hold for much longer.

GBP: Soft UK retail sales

UK March retail sales have come in slightly softer than expected this morning. That has clearly been overshadowed by news from Iran, but retail sales should not change the picture anyway for the Bank of England.

Anyway, data this week has pointed to a lower probability that the BoE will start cutting rates before August, which is the month when our economist expects the first move.

That has led us to believe that EUR/GBP will struggle to find much support in the short term, despite our medium-term call on the pair being moderately bullish. If we do see a geopolitical risk escalation, GBP should, however, be in a more vulnerable spot than the euro, given the pound's higher sensitivity to global risk sentiment and CFTC data showing that GBP has the largest net-long positioning in G10.

JPY: Lower than expected CPI in Japan

Overnight developments have been driving the yen higher, although domestic developments may have contributed to JPY lagging the Swiss franc in this risk-off environment.

Japan's national inflation figures came in below expectations this morning, with headline CPI slowing from 2.8% to 2.7%, and core CPI from 2.8% to 2.6%. Core inflation excluding fresh food and energy actually moved below 3.0% for the first time since 2022.

Our Japan economist discusses what the implication of the release could be for the Bank of Japan's tightening prospects in this note. While a pause at the April meeting is largely expected, we still think risks are skewed to an earlier hike compared to what the market is currently pricing. Market expectations are currently for a move in October, while our economist is calling for a 15bp hike in July followed by a 25bp hike in October.

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Economic

Forex

We saw the British Pound fall in the minutes after the ONS announced UK retail sales showed no growth in March 2024 (0% month-on-month). Losses would have been greater were it not for a positive revision to 0.1% from 0% for February's release.

The market had been expecting solid growth at 0.3% m/m and the disappointment was reflected in a dip in the Pound to Euro exchange rate to 1.1668 from 1.1678. The Pound to Dollar exchange rate fell to 1.2405 from 1.2414.

The ONS says hardware stores, furniture shops, petrol stations and clothing stores all reported a rise in sales. However, gains were offset by falling food sales and activity in department stores. Retailers in department stores reported to the ONS that high prices had impacted trading.

"Department stores remain an area of particular weakness, not good news for John Lewis which announced it would not be paying its regular staff bonus for the second year in a row during the month," says Nicholas Hyett, Investment Manager at Wealth Club.

"Bad weather could also have dampened consumer demand and retailers will likely be hopeful the warmer weather and upcoming May bank holidays will boost momentum," says Gizem Günday, Partner at McKinsey & Company. More broadly, the surge in inflation continues to leave its mark: retail sale volumes are still 1.3% lower on an annual basis than pre-pandemic.

The Pound looks set to remain under pressure against the Euro and Dollar and is registering another weekly loss against both currencies. These retail figures will only add to the sombre mood surrounding the currency.

This week's losses for Sterling come despite above-consensus wage data and inflation prints. If a beat on expectations for the two marquee events in the Pound's monthly calendar can't stimulate the currency, perhaps no data will.

Pound Sterling: Retail Sales Miss Cements a Weekly Loss against Euro and Dollar_1

Above: GBP/EUR (top) and GBP/USD at weekly intervals.

The currency's negative reaction to the above-consensus data suggests that in the market's eyes, the Pound is a sell, whatever the weather.

Bank of England Governor Andrew Bailey's midweek comments have certainly played a part in GBP's underperformance. Bailey told fellow central bankers in Washington that there was nothing in the latest inflation data to cause concern. Markets interpreted this as a clear signal he is going to push through an interest rate cut in June.

A June rate cut would come alongside a cut at the ECB, which should keep the Pound-Euro exchange rate in its existing 2024 range for the foreseeable future.

But a June cut would come well ahead of cuts at the U.S. Federal Reserve, RBA and RBNZ, which could result in GBP weakness against the USD, AUD and NZD.

"BoE Governor Bailey has argued strongly this week that the MPC can start cuts soon. We expect the first BoE rate cut in June," says Rob Wood, UK Economist at Pantheon Macroeconomics.

Source: Poundsterlinglive

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Owen Li

Economic

Carbon dioxide emission taxes, prices and markets have been touted as key to stopping global heating. However, carbon markets have failed mainly because they favour the rich and powerful.

Market solutions better?

Mainstream economists believe the best way to check global heating is to tax greenhouse gas (GHG) emissions. Equivalent "carbon prices" have been set for the other significant GHGs. But many have been revised because of their moot, varied and unstable and arguably incomparable nature.

High carbon prices for GHG emissions are expected to persuade emitters to switch to "cleaner" energy sources. Higher prices for energy-intensive goods and services are supposed to get consumers to buy less energy-intensive alternatives.

Positive carbon prices tax fossil fuels, GHG emissions and products according to their energy intensity. Thus, when carbon prices fall, they deter fossil fuel use less effectively.

Developed countries have set up "carbon trading" systems ostensibly to deter GHG emissions. Firms that want to emit more than their assigned quotas must buy emission permits from others who commit to emit under quota.

Getting prices right?

Conventional economists believe carbon prices should cover the "social costs" of GHG emissions, but they disagree on how to estimate them. But policymakers believe it necessary to discount these prices to gain broad acceptance for carbon markets.

A recent International Monetary Fund paper acknowledged that "differences between efficient prices and retail fuel prices are large and pervasive". But such distortions undermine the very purpose of carbon pricing.

Gro Intelligence estimated the social cost of carbon emissions at US$4.08 a tonne in 2022, which is used by the influential Gro-Kepos Carbon Barometer. But Resources for the Future estimated it at US$185 a tonne, more than 40 times higher.

While carbon prices are meant to tax fossil fuels, low prices reduce their deterrent effect. Fossil fuel subsidies lower carbon prices, which can even become negative. Such price subsidies undermine carbon markets' intended effects.

Whenever carbon prices are discounted or deliberately kept low, they are much less effective in deterring GHG emissions. They also distort the price system with many other unintended, but perverse, consequences.

Writing in The New York Times, Peter Coy noted the carbon price rose from under US$4 a tonne in 2012 to almost US$20 a tonne in 2020 before dropping sharply to around US$4 a tonne in 2022.

Incredibly, he still concluded that carbon prices had been "headed in the right direction" since 2012. How low and volatile carbon prices are supposed to discourage fossil fuel use and accelerate renewable energy investments must be self-evident to him alone?

Western fossil fuel subsidies

Carbon prices shot up when fossil fuel energy prices spiked after the Russian invasion of Ukraine in February 2022. But they soon collapsed as European governments intervened to subsidise energy prices.

As the rich nations' Organisation for Economic Co-operation and Development noted, "government support for fossil fuels almost doubled in 2022" to more than US$1.4 trillion.

State subsidies rise with prices when governments try to mitigate rising fossil fuel prices. Such subsidies negate the purpose of carbon pricing, and can lower them so much as to become negative.

Such subsidies were deemed necessary to retain public support for Nato's Ukraine war effort and to drive down Russian fossil fuel export prices. Thus, such "geopolitical" interventions have undermined carbon taxes, prices and markets.

Carbon prices dropped sharply worldwide, from US$18.97 a tonne in 2021 to US$4.08 in 2022. In 2022, nine of the 26 countries in the Barometer had negative prices, with only six — not the US — above US$25.

Oil and natural gas prices have since fallen from their 2022 peaks, with consumer subsidies declining correspondingly. Thus, carbon prices for GHG emissions have recovered.

Such price subsidies and volatility do not help enterprises plan and invest their energy use — crucial to accelerate needed "carbon transitions".

Unsurprisingly, after more than a decade, there is little evidence that carbon markets have effectively cut GHG emissions to avert climate catastrophe. Clearly, they cannot be counted upon to cut them sufficiently.

China, market conformist

Significantly, after China began its emissions trading system in 2021, its carbon price rose to a level higher than the US price in 2022. As its per capita income is much lower than in the West, its higher carbon price is probably a more significant deterrent to fossil fuel use.

China is now the world's largest carbon emitter, so its US$19-a-tonne price in 2022 significantly raised the international weighted average. Nevertheless, thanks to the subsidies, the weighted average for all other countries was negative at -$4.50 a tonne in 2022.

Despite much rich-nation rhetoric demanding carbon prices and markets for the whole world, their own commitment to this problematic approach to mitigating GHG emissions has been much more compromised than China's.

Source: The Edge Malaysia

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Warren Takunda

Economic

The bond market’s outlook on inflation is a key component for Federal Reserve policymakers in determining interest-rate policy. And what traders are signaling now is potentially problematic.

So says Benson Durham, head of global asset allocation at Piper Sandler and former Fed economist. He points to his adjusted measure of long-term inflation expectations, which has ticked higher in recent months to exceed the Fed’s target of 2% — a sign traders see price pressures continuing into the future.

The risk for central bankers is that these expectations fuel actual inflation — and so, should they continue to bubble up, that could prompt a response in the form of a Fed rate hike, Durham says.

“Unachored long-run inflation expectations would prompt another Fed hike like nothing else,” Durham said in an interview. “We’re not there yet, but our eyebrows are raised.”

Already this year, hot inflation data and a persistently strong labor market have prompted Wall Street forecasters and investors to drastically scale back their expectations for rate cuts this year. Some now even speculate that the central bank’s next move could be a notch higher in rates, something Fed Bank of New York President John Williams signaled Thursday is possible should conditions warrant.

An auction Thursday of new five-year TIPS drew ample demand, proof of investor appetite demand for bonds that compensate for the risk of inflation.

Particularly troubling to Durham is the rise in long run market-based measures of future inflation expectations, specifically the so-called five-year, five-year forward breakeven. The gauge — derived from Treasury Inflation-Protected Securities and traditional government debt — measures projections for average annual consumer price increases for the half decade beginning in five years.

The Fed itself has its own measure of the rate that it’s used to help guide policy for years, and it has moved upward this year. Durham and Piper Sandler’s Melissa Turner detailed in a note on Wednesday how their adjusted models for the gauge get a cleaner read of pure long-run forward inflation expectations by stripping out other factors affecting Treasury yields. These include liquidity as well as term premium — generally described as the extra compensation investors demand to own longer-term debt instead of rolling over shorter-term securities as they mature.

“Estimates across models at the five-year horizon, relative to the Fed’s mandate, are not unmoored but are nonetheless greater than the long-run target,” said Durham, who during his tenure at the Fed helped the central bank create an options-based model deriving the market’s range of trajectories for the funds rate. “What really would get the Fed’s goat would be if people didn’t think they were going to hit their long-run inflation goal.”

Treasury term premium for its part has moved higher this year also. The term premium on 10-year securities moved above zero this week for the first time since November.

A more hawkish outlook for the Fed’s policy plans this year has upended hope for now that a popular wager on a steepening yield-curve — when short-term rates fall below those on longer-term debt — will pay off. As of Thursday, US two-year Treasuries yielded about 35 basis more than than 10-year US notes, compared with just under 16 basis points in January. Durham sees this trend continuing if long-run inflation expectations continue to increase.

“If I was to pick one indicator of whether the Fed was going to hike or to cut, these long-run inflation expectations would be at the top of the list,” said Durham. “Fed officials have said over and over again that their target is 2% and they are committed to that. And the more they get the sense that investors don’t think they are going to get there then the more they will feel they need to demonstrate that they mean business.”

Source: Bloomberg

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Thomas

Economic

California was once the wonderland where dreams come true. From Disney and Hollywood to its lush landscape and powerful politics, it seemed like a utopia of diversity, forward-thinking ideas and the picture of economic health.

California's per-capita income and gross domestic product were soaring thanks to a thriving agricultural industry, a booming tech sector and what was then lower unemployment rates. In 2022, the state had the fifth largest economy in the world, boasting a higher GDP than most developed countries.

More millionaires lived in California than ever before with data showing their number grew 66% from 2019 to 2021.

As California slowly adopted more progressive policies, even right-wing America had to nod to its thriving economy.

What went wrong with California's economy?

But California's booming economy has taken a hit lately, thanks to liberal policies that have taken root. Things like tax hikes, hefty regulations and policies were progressive but failed to produce positive outcomes. According to The Economist, “The state faces three overlapping challenges: rising unemployment, growing fiscal strains and population outflows.”

The California Center for Jobs and the Economy found that California's economy may actually drop from fifth best in the world. The state's GDP growth was 32nd in the nation last year thanks to revenue drops from rising unemployment, among other factors.

There are a few indicators of where the state's economy is heading. The cost of high gas and housing prices are ushering in an affordability crisis. California now has the highest unemployment rate in the country. That's more than a million unemployed workers.

How do California economic policies compare with Texas?

As a comparison, we can look at how Texas, a Republican-run state, matches up with California. The Texas economy is second to California among U.S. states and eighth in the world.

Even when California's economy was humming along, a 2021 Stanford University study comparing Texas and California's economies points out stark differences between red and blue governing styles that foreshadowed California's slow descent.

In California, state and local government revenues and spending were 60% higher than Texas on a per-resident basis. California has the country's highest top marginal individual income tax rate, while Texas has no individual income tax (property taxes are higher in Texas though).

“State and local governments in California and Texas spent $638 billion and $291 billion, respectively, in the 2019 fiscal year, which represented $16,105 and $10,024 per resident,” the report reads.

California thinks a larger taxpayer-subsidized government is the answer to their residents' problems; Texas wouldn't presume that.

Liberals in la-la land:High wages, 32-hour workweeks sound great, but there's a steep price

California's decision to boost minimum wage only made things worse

The California legislature added to the problems by passing a law that boosts minimum wage.

Starting April 1, fast-food restaurant employees must be paid at least $20 an hour. Sounds nice right? Kinda makes slingin' burgers at McDonald's look a bit more appealing, doesn't it? Not so fast.

If an employer is required to boost wage earners' take-home pay per hour by several dollars, that cash must come from somewhere. Businesses either need to cut other salaries, raise prices for customers to compete with the costs or – worst-case scenario – shut down.

Restaurants are already starting to feel the repercussions.

Industry experts have suggested that to offset the increased cost to their bottom line, some business owners may choose to replace workers with kiosks or other technological advances.

The new minimum wage law isn't a boon for customers, either. Several fast-food chains in California have already indicated they'll be forced to raise prices on menu items.

DEI doesn't work:Texas proves DEI programs aren't just wasteful – they've failed. Focus on merit instead.

The new minimum wage law in California will hurt small businesses, too.

Celebrity chef and host of “Restaurant: Impossible” Robert Irvine told Fox News Digital, “We're going to lose about 20-plus percent of our small, mom-and-pop business because what California has actually done is going to enable other states to do the same thing. (It) has opened the gateways to other states to raise that minimum wage.”

Irvine is right: California is sometimes a precursor when it comes to social, political and economic policies. The rest of the country should reject this, full stop.

In fact, there's evidence residents think life in their beloved Golden State is no longer sustainable. California residents are fleeing in droves, often to states with no income tax like Florida and Texas.

Voters have a chance to reject some of Newsom's liberal policies

One November ballot initiative could stem the tide a little and begin to balance California's economy. The Taxpayer Protection and Government Accountability Act would require voter approval for any new California taxes or tax increases and could therefore limit upcoming tax increases at state and local levels. The provision is designed to curb tax increases that often occur without oversight.

Of course, Newsom doesn't favor the initiative, which is why Californians should.

Progressivism aside for a moment, Newsom shows promise as a Democratic presidential candidate. He's charming and adept at steering the helm of a behemoth economy, and voters like him.

However, behind the charisma is a leader who has helped derail California – even its once untouchable economy – by implementing progressive policies that hurt residents.

Newsom is a case study in just how important ideology and policy are – socialist ideas in practice can, or should, hurt even the most promising politicians. If he's serious, he'll need to position himself toward the center more and start listening to voters when they tell him they want oversight when it comes to state and local taxes.

Decades of progressive policies helped California become a socialist utopia. It was only a matter of time before the economy reacted to tax hikes, hefty regulations and policies that sound progressive but fail to produce positive outcomes.

The minimum wage increase is just the latest example of why California's economy is starting to struggle and America shouldn't count on Newsom to fix it. Because even California liberals can spend their way out of a good economy and into one that's highly taxed and heavily regulated, that boasts the highest unemployment rate in the country and is increasingly unaffordable.