Although the market has started to ignore the Ukraine situation, it should climb up to a peace agreement which seems likely. Ukraine’s leading negotiator David Arakhamia stated that peace-accord talks with Russia continue to progress ahead of further talks today. Russia’s top negotiator Vladimir Medinsky noted that he did not believe in the possibility of a presidential meeting and did not share their optimism. German Chancellor Olaf Scholz stated that the U.S. and Europe would continue to impose sanctions against Russia over the next week, and they will discuss stopping energy imports.
The US and Europe are facing huge inflation. European Central Bank Executive Board Member Isabel Schnabel stated that high inflation would likely continue, and interest rates could rise as early as the fourth quarter. Eurozone economic sentiment fell to its lowest level since July 2020 as investors became more pessimistic about their outlook.
This morning Aldi, a leading German grocery store, is expected to raise prices on goods ranging from 205-50%! “Since the start of the Ukraine war, there have been jumps in purchase prices that we have not experienced before,” a spokesperson for Aldi Nord announced on Friday.
A fortnight ago, Aldi raised the prices of about 160 items, and a week later 20 more items became more expensive. Other supermarket brands quickly followed suit.
Many are predicting similar increases in the US that could be followed by “Food Riots.” All of that’s coming – and soon, says Texas-based food scientist and “Health Ranger” podcaster Mike Adams, who sees dire events unfolding in America in the short term. His advice: people need to get prepared now. “The thing to really watch for is the food inflation. “My position is we’re going to see food riots in America before the end of this year. We’re going to see flash mobs in grocery stores—especially for meat products.
Fed and Recession
Investors are waiting for Minutes from this week’s Federal Reserve policy meeting for clues about the direction of interest rate hikes. Federal Reserve Bank of San Francisco President Mary Daly stated that rising inflation and tight labor markets increase the likelihood of a 50-basis rate hike in May. Federal Reserve Bank of New York President John Williams said that the central bank must normalize interest rates and could start to shrink the balance sheets as early as May.
At the top of this week’s headlines and concerns is Larry Fink, CEO at Blackrock ($10T AUM), warning that the Federal Reserve lacks tools to stop supply shocks, leading to higher inflation soon.
As commodities prices have fallen from their recent highs, I believe we will see peak inflation in Q2 and Q3. Larry Summers, the former Treasury Secretary, claims that this is reminiscent of the late 60s/70s “Great Inflation.” Here are the words of Summers this week:
Here’s what Summers had to say this week:
“I’m probably as apprehensive about the prospects for a soft landing of the U.S. economy as I have been any time in the last year. Probably actually a bit more apprehensive. In a way, the situation continues to resemble the 1970s, Ezra. In the late ‘60s and in the early ‘70s, we made mistakes of excessive demand expansion that created an inflationary environment.”
“And so now I think we’ve got a real problem of high underlying inflation that I don’t think will come down to anything like acceptable levels of its own accord. And so very difficult dilemmas as to whether to accept economic restraint or to live with high and quite possibly accelerating inflation. So I don’t envy the tasks that the Fed has before it.”
Bill Dudley, former New York Fed Bank President, stated that recession was inevitable. That’s exactly what the yield curves show right now. The 2/10-year yield curve fell from 0.2 to just 0.049 last week. At the same time, the 5/30-year yield curve dropped to 0.037. A sustained inversion of either yields curve is a reliable indicator that there will be a recession in the next 12-18 months.
Patrick Harker, President of Philadelphia Reserve Bank, stated that the Fed had “collectively underestimated federal spending and stimulus payments would make on inflation.” This is another indication that the Fed has been slow to catch up on inflation. One note about real estate: Esther George from Kansas City, another Fed Bank president, stated in a speech this past week that the future of commercial real estate was in doubt as many workers aren’t returning home to work. Next week, we’ll be looking at the bubble in commercial real estate.
We’ll see the first-quarter corporate earnings in two weeks. Goldman Sachs warns that many will have weak earnings due to inflation, supply crunch, and other factors. Concerning supply, there are many reports that American farmers are moving away from corn and wheat as fertilizer-intensive crops to plant soybeans and other crops that require less fertilizer. This will reduce wheat and corn yields and increase prices.
The World Bank has warned of a tsunami of sovereign debt defaults in the coming 12 months as governments struggle with rising interest rates to pay their debt payments. These defaults will be most prominent in emerging and developing economies which account for 40% of the global gross domestic product (GDP). I am also beginning to notice early signs of rationing as Austria, Germany, and Spain have started to set purchase limits to avoid shortages.
The G7, the seven most advanced economies globally, issued a statement advising countries to avoid protectionist policies for global trade to continue open. This week, the People’s Bank of China pledged to stabilize markets and ensure food supplies, particularly in most affected rural areas. There are signs that food shortages will become a worldwide phenomenon in the coming year compared to previous years.
BONDS
Bonds continue to get KILLED and the STRONG BEAR trend likely to continue for some time. The Fed’s hawkish attitude helped drive the yield on US 10-year debt back up to 2.46 percent.
On Friday, however, the Treasury yield for two years was well above that of the 10-year yield at 2.43% instead of 2.38%. This is a stronger inversion than Tuesday’s when the 2-year Treasury yield briefly surpassed the 10-year yield for the first time since summer 2019. The yield curve has also inverted for other parts that are less well-known. They don’t have the same success rate in predicting recessions as the 3-month yield versus 10 years, but they do show that the trend is moving toward pessimism.
It took less than one year for the global economy to plunge into recession after the 2019 inversion. The bond market didn’t see the pandemic coming at that time. It was more concerned about slowing growth and global trade tensions.
Financial advisors and investors should take note that the US 10YR yield went over 2% which is over the average S&P 500 dividend. Bonds are getting crushed, but we think investors will start moving out of equities into higher-paying conservative investments such as CDs.
CRYPTO
We are seeing renewed energy on the crypto-currency front this week. Bitcoin recovered almost 10% and returned to $47,000 and the trend seems very BULLISH! The Nasdaq is still tied to crypto-currency. After Elon Musk’s 9.2% stake, Twitter stock and the price of Dogecoin rocketed after the social media giant. Oklahoma is considering a tax incentive for bitcoin miners. John Michael Montgomery, the bill’s cosponsor is a description of the proposal. Kalman Gabriel, Digital Strategies, shares insights about ApeCoin’s rise & fall.
OIL
Oil prices have fallen below $100 due to the unprecedented decision of Biden to release 180,000,000 barrels of oil from his country’s strategic oil reserve in the next six months. Although there are still upside risks, oil prices are set to experience their biggest weekly decline in the past two years.
We believe the price drop may be temporary under the current conditions. However, a peace agreement between Ukraine and Russia could cause prices to drop to $80.
The US oil-and-gas company output reached its highest level in six decades. The Federal Reserve of Dallas surveyed major industries and found that 15% of large companies plan to increase their growth by 30% in the coming year. Respondents forecasted that US crude oil could reach pre-invasion levels by this year. These long-term predictions contrast with short-term forecasts by top oil traders who warned that prices could rise to $200 per barrel.
PRECIOUS METALS
The upward trend in metal prices has also been resumed, but has failed to huge rally investors thought would come due to rising inflation. The upward trend in metal prices has also been resumed, but has failed to huge rally investors thought would come due to rising inflation. The relaunch of the Russian Ruble to a “Gold Standard” may cause an increased interest in gold.
