Well guys, we’re crashing.
People are realizing that inflation has not peaked, supply chains are jacked up, profit margins are about to plummet, consumers are tapped out, and the Fed has no good options.
It could get uglier as these realizations continue to sink in. They may even completely overwhelm investors’ hard-coded pavlovian “buy the dip” response.
Many seem to be pinning hopes on the Fed pivoting to “easing” mode ASAP. But in some ways, the idea of GigaQE also terrifies a shell-shocked American public. They know it would accelerate inflation.
But it’s important to realize that inflation isn’t just a monetary/financial issue. Embargoes and sanctions are also playing a key role in price hikes.
Treacherous Trade Wars
Countries all over the world are going into wartime mode. They’re cutting off exports of wheat, gas, rice, fertilizers, and other critical goods. Unless these economic measures stop escalating soon, things will get ugly.
World economies today are highly interdependent. As just one example, let’s look at urea. Russia is the world’s leading exporter of this ammonia by-product. And China is the fourth-largest exporter of urea.
Urea is an important fertilizer, and a critical component of diesel fuel. There is a worsening diesel shortage in the US and EU, and prices are soaring. The current fuel problems are related to: embargoes, trade restrictions on Russian and Venezuelan diesel, and other factors such as railway labor shortages. As you all likely know, a diesel shortage is no laughing matter.
Many of the supply issues we face are the result of intentional economic measures. From all sides. For example, since 2021 China and Russia have both sharply limited urea and other chemical fertilizer exports to “unfriendly” Western countries. Russia eased restrictions in June, but is scheduled to reinstate them in July.
Here’s the latest on China’s fertilizer/chemical export restrictions via The Western Producer, a farming industry magazine.
The market is also keeping close tabs on China, which has yet to lift its export ban on phosphate and nitrogen fertilizer products, which was supposed to expire in June.
Nobody knows what’s going to happen on that front. There is speculation ranging from China having a full export program starting right away to the country extending its ban until the end of December or even June 2023.
…Russian tonnes have been arriving in markets like India and Brazil.
If China expands their fertilizer export curbs to June 2023, that’s not good. I view this as almost a coordinated economic attack. Putin’s Russia and Xi’s China are asserting their roles as world superpowers. We in the West are also employing dirty financial and economic tricks.
This is not the one-sided trade war some would make it out to be. This is the prelude to the biggest geopolitical changes we will see in our lifetime (hopefully). A new group of sovereign superpowers is on the rise. China, India, and Russia. OPEC+ (OPEC plus Russia Mexico Venezuela Sudan and others) is also flexing. The BRICS are recruiting Argentina, and numerous other countries.
Somehow we must come to friendlier terms with these newly-empowered blocs. An economic war is not sustainable, especially now. I hope that negotiations are well underway behind the scenes. Because we risk a global famine and financial collapse if we don’t reach some sort of detente soon.
The financial/monetary/inflation problems in Europe and America are essentially baked in. We have to deal with debt, deficit, waste etc regardless. And it’s going to be rough. But the economic and geopolitical matters are different. Many of the key issues could be settled by skilled and motivated diplomats. Unfortunately, there’s a noteworthy shortage of those in diplomatic corps today.
There’s certainly a chance we see a diplomatic breakthrough soon in Ukraine, and on broader global economic issues. That would help immensely. I hope for this. But my base case is that global financial warfare continues. As long as it does, we should all be prepared for high turbulence.
Risk/Reward: Metals, BTC, Altcoins
By my estimation, gold and silver continue to clearly offer the best risk/reward in the market. Precious metals are selling off, but less so compared to broader markets. They are likely to outperform stocks significantly from here, in my view. They may go significantly lower first, though. If they do I’ll buy more.
Crypto is vulnerable and could nuke. We may get a chance to buy Bitcoin at $10k or lower, who knows. Anything is possible in markets like this, as we saw in March of 2020. Once the Fed is forced to give up on its rate-hike campaign, and launches GigaQE, I expect BTC to take off like a rocket. But it could be ugly until then. Sorry guys that’s just how I see it.
And altcoins. Oh boy. I fear altcoins may be facing a nuke that could last a while. I just returned from Consensus 2022, the big Ethereum conference (thanks to HIVE Blockchain for sending me). It was fascinating to be there as altcoin “defi” yield-farming schemes like Celsius and Luna unraveled. Turns out they were neither decentralized nor stable. The mood among the industry was somber, but we still had a blast in Austin. What a great city.
The breakdown of these ponzi-esque models will bring regulatory scrutiny and bankrupt a lot of investors. Altcoins are almost certainly in for a tough year, maybe longer. There will be some bright spots, and we’ll try to find them, but overall the alt market is likely headed for a major correction. Once it becomes clear who the survivors are, we’ll see some nice buying opportunities.
Ethereum could be facing some nasty headwinds as well, especially if the long-awaited “merge” to proof of stake is substantially delayed again. I suspect it will be. The task they’re attempting is massively complex. More on that soon.