Energy is ‘the blood of an economy’ and can’t be restricted without alternatives: Teton Capital CEO

Teton Capital CEO David Sokol examines inflation's impact on the U.S. dollar, the economic weight of energy markets, and the Fed's rate hike cycle.

Video transcript

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DAVE BRIGGS: Welcome back, everybody. Markets popping on this day. But when it started, we were talking about some bad earnings reports from Johnson & Johnson and IBM both warning of the strength of the US dollar, and how that would hold them back in future quarters. Let's talk about that amongst many other things with David Sokol. He's the CEO of Teton Capital, the former CEO of NetJets, and the author of "America In Perspective". Good to see you, sir. Thank you for being here in studio.

So the strength of the dollar, some people are all excited. Seana gets to go buy a Prada bag for a lot less over there in Europe. I'm just kidding with you. But IBM and Johnson & Johnson warning that it's going to hurt future quarters. How significant, what are the implications of the strength of the US dollar today?

DAVID SOKOL: Well, I think they're predominantly caused by the fact that the US Federal Reserve is moving faster to try and control inflation and moving our interest rates up. And I think that's the European Union has taken a much slower pace, as is Japan. And I think that's fundamentally the primary driver of the difference in the currencies.

It affects business, but if you do business around the world, it's something you deal with annually. And it'll go up and it'll come back down. So I think it's something you have to manage from the standpoint of how reporting your earnings and occasionally hedging. But it's a tough thing to hedge if you're in a lot of different countries. So I think it's really, from my perspective, we kind of separate it out of the earnings when we look at a company.

SEANA SMITH: David, when you take a look at the most recent inflation numbers, 9.1% was the latest print that we got on inflation. Rising prices, obviously, a huge issue when we couple that with a slowing economy. What do you think the fed should do to get inflation under control?

DAVID SOKOL: Well, they're smarter about it than I am. And they have a lot more data. But the reality is they need to move as they are quickly. I think in hindsight, it would have been better to see 75 basis points at their first move. And frankly, I'd be comfortable with a hundred basis points in the next move, even if it turns out to be slightly too much. The louder the message that the fed is serious, the better.

We're seeing the economy adjust. Housing contracts, mortgage applications, all kinds of different indications. But inflation is a dangerous thing. And particularly when we have such a totally strange energy policy, if you want to call it that, although I would-- I'm not sure it's a policy, but that piece of the inflation is not going anywhere soon because we're constricting supply, demand destruction with high prices will happen.

But the United States has the ability to be producing 15 million barrels a day. And we're now almost two million barrels a day less than we could two years ago. And that's a lot in the overall global energy sector. So I think the fed needs to get the economy slowed down and people recognize it quickly.

DAVE BRIGGS: Are you suggesting the Biden administration has held back production, domestic production?

DAVID SOKOL: Well, they've done-- yeah, the problem with this administration, and I think several administrations in a row, are we don't have a plan. And the first steps out of the blocks of stopping Keystone Pipeline, things of that nature, from my perspective, the blood of an economy is energy. And until you have alternatives to shift to, you can't be restricting your best sources. You can make them more efficient, you can place regulation in place to cause industry to adjust.

But to me, it's schizophrenic to be trying to stop the use of clean natural gas until we have alternatives, till we reintroduce nuclear power. Because you can't reduce the global CO2 footprint unless you use an enormous amount of nuclear power. It's just not engineering wise. And I've spent my career in the energy industry. And it just isn't doable. So that was a huge misstep. And unfortunately, it was for political reasons rather than any accomplishment reasons.

RACHELLE AKUFFO: And David, I want to bring in, obviously, the title of your book includes the American dream. A lot of middle class Americans struggling right now. According to data from Primerica, 75% of middle class households say their income is falling below the cost of living. What is this doing to the American dream? It used to be about having the house, but then you see house prices also too high for a lot of people to afford.

DAVID SOKOL: Well, the American dream I believe, and it's the reason Adam and I wrote the book, is alive and well. And my primary motivation is to make sure a young man or young girl from rural Nebraska, or rural America, has the same opportunity to chase their dream that we had. And I think it's there. America is exceptional. But we have to get back. One of the big mistakes we're making as a country, and this isn't meant towards left or right, it's meant to both, is our Constitution was created to develop consensus when we make major decisions.

And we've gotten away from that. We now want to bludgeon each other from the right or the left that we're right, you're wrong. And the entire legacy of our country today and the success is based on the self-healing nature of a capitalistic meritocracy based on consensus. And just, I mean, take the issue about CO2. We've not reached a consensus in this country. People claim we have. People say it's absolutely proven.

But where's the plan? Where is the long term plan to get China and India involved? All of these things are creating this image to the young people in this country that there is no American dream. You think about it, has anybody ever talked about the China dream, or the European dream, or the Russian dream? The reason it was a dream for Americans is because it's a country, the first country in history, that was formed by the people, and by the founding fathers.

But one of the key tenets was it takes 75% of the states to amend our Constitution. It takes 60% in the Senate to pass a bill, 2/3 to impeach someone. Those were all intentionally put there to control consensus, that we don't rule from the right or the left, we rule from the middle. And we've lost that. And I think that's sending the wrong message to young men and women today because the reality is with technological change in those things, if we get back on track-- I would love to be 18 again because you can get--

When I was younger, it cost a lot to start a business because heavy industry and things of that nature, you just-- I certainly didn't have the pocket book. Today, the technology allows young people to be creative on a phone and create real value. And I'd make one other comment. The American dream isn't just about being a business person or getting rich. Maybe it's about being an artist, or a great teacher, but chasing your dream. That's still there.

Now no question, the current inflation situation, wages aren't keeping up with inflation. We went a long time without that scenario. We've got to fix it. That's why the Federal Reserve has really got to take this seriously, even if it puts us into a general recession. It's the price we're going to pay for throwing too much money into the economy from government stimulus.

DAVE BRIGGS: Jerome Powell has been clear about that. He is willing to do what it takes to kill inflation. You're speaking by language. But consensus builders in Washington DC are an endangered species, if not extinct entirely. But I look forward to reading the book. It is "America In Perspective, Defending The American Dream For The Next Generation". David, thanks for being here. Appreciate it.

DAVID SOKOL: Thank you. Appreciate your time.

DAVE BRIGGS: Look forward to reading it.