By Alejandro A. Tagliavini*
Violence is not free, destroys… or could really anyone believe that closing entire countries, confining cities using the police force would not bring consequences. To put it quickly, the quarantines and other restrictions coercively imposed by governments – and endorsed by a large majority of the population, very frightened – obviously produced a very sharp drop in almost all activities.
And, in the face of this collapse violently produced by the States, they did not think of a better idea than to «stimulate» by giving away money -injecting bills as if wealth could be created from nothing- that was spent treacherously, now leaving a debt impossible to pay with which it is necessary to adjust in fact, via inflation and via the artificial increase in credit costs, which will make production and consumption even more difficult.
Now, and not saying this with a vengeful spirit, it was repeatedly warned that quarantines would cause much greater damage, exponentially greater, than what it would supposedly prevent. It is very important that those who promoted and implemented these restrictions first understand that they must never act under the influence of fear and then understand that they must apologize because otherwise, if the failure is not recognized, humanity will continue to self-destruct. By the way, to think that it will be nature that destroys man is extremely stupid and incoherent.
But let’s go to the cold analysis. The Federal Reserve raised its target interest rate by three-quarters of a percentage point on Wednesday to curb a rally, but it turns out that it is decided after data showed little progress in its battle so far, and «return to its target» of 2% of “inflation”, strictly speaking, the rise in the CPI that relatively reflects real inflation thanks to the fact that prices in the US are relatively free.
It will also continue to reduce holdings of Treasury bonds and mortgage debt, following the path it already set at the May meeting. In addition, they anticipated that a rise of three quarters of a point or half a point would be «very likely» the appropriate outcome of the next central bank meeting in late July.
But of course, since they confuse inflation with a rise in the CPI, the Fed partially blames «the war in Ukraine and China’s confinement policies» when these events undoubtedly cause variations in some prices, but not inflation, which is the depreciation of the currency for excess in the issue. Ironically, and this can be confusing, the dollar – the DXY index – «revalues» but only against the other currencies that depreciate even more.
The move raised the short-term federal funds rate to a range of 1.50% to 1.75%, with Fed officials projecting a rate hike to 3.4% by the end of this year and up to 3.8% in 2023, which represents a substantial change from the median of the March projections, which foresaw a rise to 1.9% this year.
As sharply tightening financial conditions will weigh on growth, the Fed now sees the economy slowing to a below-trend growth rate of 1.7% this year – from 2.8% forecast earlier – and unemployment will increase to 3.7% at the end of 2022 and it will continue to rise to 4.1% until 2024 and considers that inflation, measured by the price index of personal consumption expenditures, will be at 5.2 % this year and will only gradually slow to 2.2% in 2024.
How bad the prospects will be that it is difficult to find a more pessimistic scenario in the history of Wall Street. And more than half of the companies on the NASDAQ have been reduced to less than half, that is, half of the Nasdaq constituents are trading at least 50% below their 12-month highs:
And many gurus sincerely believe that stocks will never rise again in our lives to the level they left off. In fact, they continue to fall despite that the three times the Fed raised rates this year Wall Street soared, although the enthusiasm was short-lived as can be seen in this S&P chart:
Now, theoretically, historically, raw materials fell when the dollar index (DXY) increased or, rather, maintained a stable value and, therefore, cheaper in terms of a more expensive dollar, however, today to the commodity index BCOM is not worried about the rise of the dollar:
Showing two new phenomena. First, the fact that the dollar appreciates against other currencies (the DXY index) does not mean that, in absolute terms, it does not lose value. In other words, the producers of commodities must adjust their prices for -their consumption- inflation regardless of whether the greenback improves its price with respect to other currencies. Second, that phenomena such as quarantines -which reached the height of prohibiting the transfer of laborers, services and supplies from the field, complicating production- and the war and government sanctions are harming production and distribution.
Thus, the UN, which at the time supported the quarantines, now rips its clothes off and warns of an imminent world food crisis with hundreds of millions of malnourished people, a hundred times, yes, a hundred times more than the alleged victims of covid 19 and all its variants. And the worst of the case is that they recognize that “it is only the tip of the iceberg”. Of course, they will never acknowledge their responsibility – they are bureaucrats too benefited by the States to run the risk of losing their privileges – and so they blame only «the war in Ukraine».
It is true that the Russian blockade in Odessa, Ukraine’s main port, is very damaging. From there, before the war, the country exported about six million tons of grain every month that fed about 400 million people. But not accepting that the problem began long before the war, with the quarantines, is lying blatantly to hide guilt.
Facts kill the official story. One of the most pernicious consequences has been the unprecedented increase in the prices of many inputs, particularly fertilizers, which, among other things, has caused a historic increase in food prices and the collapse of supply chains in all the world. But, while the “pro quarantine” analysts blame the war, the following curve clearly shows that the problem started much earlier and, in fact, the price has dropped in recent weeks:
In our partner Brazil, one of the world’s largest food producers, according to Bloomberg, the excess of fertilizers that accumulates in the largest Brazilian ports indicates that the price of nutrients has to fall further before farmers start buying, that is, the expectations are that it will go down, despite the war, thanks to the lifting of quarantines and other restrictions:
But there are other niceties, as always, promoted by the States (by the monopoly of violence, by violence). For example, a few days ago corn resumed its bullish streak driven by crop rationing in the US. In fact, the prices of this grain experienced their biggest rise in 15 weeks. It happens that there is a kind of insurance against bad weather, promoted by the State, which compensates those who do not sow until June 5, many farmers opting to leave millions of hectares unsown.
In short, such is the uncertainty that during the last days the sales have been imposed even in the debt market. Thus, the yield of the 10-year US debt reached new highs with returns that touched 3.42%, as did the German bund (up to 1.75%) or the Spanish (which touched 3.12 %).
* Senior Advisor at The Cedar Portfolio and Member of the Advisory Council of the Center on Global Prosperity, de Oakland, California