By Alejandro A. Tagliavini*
The markets are experiencing weeks of high volatility and most analysts highlight the «confusion» shown by many investors in relation to the future macroeconomic scenario. To begin with, because of the fact that all the restrictions “due to the pandemic” have not been lifted, the global economies, after the rebound in 2021, are still weak, as can be seen in the following table:
While the Fed «rests», Christine Lagarde, president of the European Central Bank (ECB), has just indicated that the adjustment in monetary policy will be in accordance with the economic data and, in any case, will be gradual, maintaining a cautious tone about a rise in interest rates in 2022 without closing the doors to its occurrence. Thus, the markets are already discounting a potential rise by the end of 2022.
And all linked to «inflation» -the rise in the CPI, strictly speaking- which, as can be seen in the following table, is often very badly estimated -like every state bureaucrats- by the central banks (in white the real rise, in colors the ECB estimates at different times):
“The radical change in the analysis towards inflation that central banks have experienced in a short space of time, going from considering it transitory to more permanent and ‘dangerous’, which has led them to radically modify their roadmap in terms of monetary policy, keeps many investors, both in the bond and equity markets, quite clueless”, explain at Link Securities. By the way, the ridiculousness of saying – while issuing money in astronomical figures – that «inflation» was only transitory, gave the chance to many jokes.
Link Securities analysts observe that, in the stock markets, during «the last few sessions, it has been possible to appreciate a slight preference for the securities/sectors that perform best in a scenario of economic growth, high inflation and rising interest rates, especially highlighting the financial sector, specifically banks and insurers», by the way, tied to the «financial mob» that is, partners of central banks in their businesses where the common citizen always loses, as when in Argentina, with the «corralito”, they kept other people’s money, to name an exemplary case.
Robert Almeida, of MFS Investment Management, highlights that “investors are aware that the size of central bank balance sheets has skyrocketed… (and this) reflects the scale of financial repression in recent years (maintaining interest rates below the rise in the CPI and the consequent lowering of the cost of public debt) and the resulting distortions”.
Although the Fed has not yet raised rates – but five hikes are expected in 2022 – the global trend has turned decisively, in fact, there were more than 100 rate hikes globally during 2021 and, in 2022, it is annualizing twice. eToro’s Ben Laidler warns that “higher interest rates and rising risks of an economic slowdown are also hurting valuations. It is a new global investment regime of lower but still positive returns and more volatility, driving our focus on cheaper sectors and foreign markets… History shows that markets often react with relief when rates rises begin, since the upward cycle is already priced in. There are 36 days to go until the Fed’s first hike.»
Meanwhile, two shortages threaten to severely strain the world economy, as Michael Snyder points out. In addition to the collapse of the global economy – with the increase in poverty and hunger for hundreds of millions – because of the repression of markets and people, with the excuse of «the pandemic», there have been two key global shortages that must be watched very closely.
One of them is the growing shortage of fertilizers. A few days ago, the Wall Street Journal warned that «high fertilizer prices are hurting farmers across the developing world». From the avocado, corn, and coffee plantations of South America to the coconut and oil palm plantations of Southeast Asia, high fertilizer prices are weighing on farmers, making it much more expensive to farm and forcing many to cut back the production.
That obviously means that global food prices could rise further in 2022, after a year in which they rose to decade-highs. Rebound that would exacerbate hunger, already acute in some parts of the world due to the loss of jobs related to “the pandemic” and would accelerate the rise in the CPI (the “inflation”, according to the bureaucrats).
According to the International Fertilizer Development Center, excessively high prices could result in a reduction in agricultural production, in Africa alone, “equivalent to the food needs of 100 million people”. In the USA, the prices of fertilizers based on phosphorus and potassium (potash) have more than doubled, while those based on nitrogen have quadrupled. These prices will make it impossible for many US farmers to plant profitably this year.
The other major shortage that has been in the news for several months is that of computer chips. According to the US Department of Commerce, chip inventories have been dangerously low: The average inventory held by chip consumers (including automakers and medical device manufacturers) fell from 40 days in 2019 to less than 5 days in 2021. The US Secretary of Commerce claims that the lack of chips resulted in “$210 billion in lost revenue” for automakers in 2021 that produced 8 million fewer vehicles causing an increase in prices impacting the IPC.
Chip consumers surveyed by the Commerce Department estimated that the shortage would not go away in the next six months, with some suggesting it could take until 2023. By the way, Taiwan produces 63% of global chip production. Most of the factories are in Asia which hosts about 87% of the market share of semiconductor factories. Thus, the political climate in the region and the tensions between Taiwan and China are defining, since the shortage has exposed how dependent US industry is on these sources.
* Senior Advisor at The Cedar Portfolio and Member of the Advisory Council of the Center on Global Prosperity, de Oakland, California