War Drives Up Inflation at U.S. Farms, Retailers The global supply chain is slow, but the economic fallout from the invasion of Ukraine is swiftly raising prices for producers and consumers world-wide
(…) Grain markets recently hit a 14-year high in anticipation of a diminished harvest in Ukraine, which would raise costs to feed the world’s cattle and poultry.
Aluminum prices rose in anticipation of sanctions on Russia, a major supplier of the metal used in soda cans, aircraft and construction, as well as on fears that Moscow could halt exports.
Crude oil prices rose 25% last week, to more than $118 a barrel, the highest level since 2013. Gas prices have gone up an average of 43.7 cents a gallon in the U.S., according to data from price tracker GasBuddy. On Sunday, the national average was $4.02 a gallon, according to GasBuddy. [$4.17 on Monday]
On Friday, Russia, one of the world’s largest suppliers of fertilizers such as potash and nitrogen, said it could suspend exports. Farmers and consumers will bear the cost of any prolonged shortage.
Ingka Group, which owns and operates furniture giant IKEA’s stores, said Thursday that prices would rise more than expected this year after it warned the war in Ukraine was causing serious supply chain disruptions. IKEA said its global prices would rise about 12%, up from earlier estimates of 9%. (…)
Ukrainian farmers are supposed to plant their spring crops soon. Yet even if the fighting were to stop, they may not have enough fertilizer and pesticides. Agriculture industry executives are warning of smaller yields in Ukraine, which normally has some of the world’s most productive fields. (…) “Yields could drop by 50%.” (…)
“We’ve seen grain come up,” he said. “That’s the number one cost of feeding cattle.” (…)
- Russian Threat to Cut Gas Sends European Market Into Frenzy The EU is trying to get ahead of any such moves, mapping out a plan to cut its huge dependency on Russian gas.
What would a U.S. ban on Russian oil mean for the world?
JP Morgan predicts oil could hit a record $185 a barrel by the end of 2022 if disruption to Russian exports lasts that long, although along with most analysts polled by Reuters the bank expects a yearly average price below $100. (…)
As a rule of thumb, every 10% rise in the oil price in euro terms increases euro zone inflation by 0.1 to 0.2 percentage point. Since Jan 1, Brent crude is up around 80% in euros. In the U.S., every $10 per barrel rise in oil prices increases inflation by 0.2 percentage point. (…)
Preliminary calculations by the European Central Bank (ECB) suggest that war could cut euro zone growth by 0.3 to 0.4 percentage points this year in a baseline scenario and 1 percentage point in case of a severe shock. (…)
In the U.S., the Fed estimates that every $10 per barrel rise in oil prices cuts growth by 0.1 percentage point, though private forecasters see a more muted impact.
In Russia, the damage is likely to be large and immediate. JPMorgan estimates that its economy will contract by 12.5% from peak to trough. (…)
- The West can endure an oil embargo: Putin can’t The EU is fortifying itself with remarkable speed for a new era of ‘zero gas’ from Russia
(…) The White House is sending emergency missions to Saudi Arabia and Venezuela to find extra barrels. The US is pushing for a quick deal with Tehran on nuclear proliferation to bring back Iranian crude. All normal diplomatic reservations are being set aside. (…)
Frans Timmermans, head of the EU’s energy transition, says Europe currently has enough gas to muddle through this spring whatever happens.
We have an odd situation where both sides are threatening to play the energy card, but the threats are not in reality equivalent. A crude blockade will make it impossible for Putin to continue waging serious offensive war in Ukraine beyond a few weeks. Oil and gas make up 40pc of Russia’s state budget. It is what holds the patronage machine together. (…)
Bank of America says the industry’s rule of thumb is that each “unexpected” loss of 1m b/d lifts prices by $20. A total Russian cut-off of 5m b/d would therefore lift prices to around $200. (…)
This implies recession. It would be just as uncomfortable for China, with energy use per unit of GDP almost double that of France and Germany, and 2.5 times higher than the frugal UK. The worse it gets, the greater the strain on the Beijing-Moscow axis. (…)
Citigroup’s energy strategist Ed Morse said the Western Hemisphere could produce an extra 2.5m b/d this year, much of it from US shale, but also from Brazil and Guyana.
The US is sending diplomats to the Gulf to demand extra output from Saudi Arabia and the OPEC petro-states, which are currently withholding supply to force up the price. The charm offensive comes with a warning. These states no longer have the option of playing it both ways: relying on the US security umbrella against Iran while at the same teaming up with Russia in an oil cartel. They must choose.
Helima Croft from RBC Capital Markets said the Gulf states and Iraq have up to 2.5m b/d in spare capacity that could be mobilised within 30-60 days. (…)
All is forgiven in Caracas. The Chavista regime of Nicolas Maduro is back from the cold. Ms Croft said a relaxation of sanctions could unlock 600,000 b/d. That would deliver sulphurous ‘heavy’ oil to balance the mix in US refineries, replacing heavy Urals from Russia.
The Ayatollahs are being cut some slack too. A deal could open the way for the return of 1m b/d of Iranian crude, though it will be a staggered process of over many months. Add in China’s zero-covid strategy, which cuts jet fuel use, and it is possible to see our way through this crisis. The rest will have to come from de facto rationing.
Vladimir Putin cannot easily switch his surplus oil to China. “The infrastructure is in the wrong place: the Transneft oil pipelines go to the Baltic and the Black Sea, and then you have to find somebody willing to pick it up. The Chinese haven’t got the tankers,” said Prof Riley. (…)
Goldman Sachs:
The uncertainty on how this conflict and oil shortages will be resolved is unprecedented. To attempt to provide an estimate of where oil prices are heading, we build three scenarios, ranging from a resumption in exports in the coming months to a sustained two-thirds reduction of Russian seaborne exports. Even assuming SPR and OPEC supply relief, these point to oil prices ranging from $115/bbl to $175/bbl in 2022. Given a still intensifying military conflict, escalating Western sanctions and growing isolation of Russia, our subjective probability weighting of these potential outcomes currently leaves us base-casing a 1.6 mb/d disruption. As a result, we are raising our 2022 Brent spot price forecast to $135/bbl, with our 2023 forecast at $115/bbl, up from $98 and $105/bbl respectively.
Small Business Owners Reporting Inflation as Biggest Problem Reaches Highest Level Since Q3 1981
In February, the NFIB Optimism Index decreased by 1.4 points to 95.7, the second consecutive month below the 48-year average of 98. Twenty-six percent of owners reported that inflation was their single most important problem in operating their business, a four-point increase since December and the highest reading since the third quarter of 1981.
“Inflation continues to be a problem on Main Street, leading more owners to raise selling prices again in February,” said NFIB Chief Economist Bill Dunkelberg. “Supply chain disruptions and labor shortages also remain problems, leading to lower earnings and sales for many.” (…)
Traders Surrender to Recession Paranoia in Stock Market Rout
(…) Plotting the velocity of equity gauges over their trendlines against the ISM manufacturing report, Chadha found that the S&P 500 is pricing in a plunge in the factory gauge to 48 — below the level consistent with growth. Small-cap stocks reflect deeper troubles. The Russell 2000, which is already in a bear market, appeared to price in a manufacturing reading of 40, a level indicating a “severe recession,” he said. (…)
Market veteran Ed Yardeni, citing rising recession risk, slashed his target for the S&P 500 for a second time in as many months. At 4,000, his new projection implies a 17% drop from the index’s peak in January. (…)
A 2014 study by Prakash Loungani of the International Monetary Fund found that not one of 49 recessions suffered around the world in 2009 had been predicted by the consensus of economists a year earlier. Loungani previously reported that only two of the 60 recessions of the 1990s had been anticipated a year in advance. (…)
Among all the 20% drops that have hit American stocks since the Great Depression, all but two preceded or coincided with U.S. recessions, according to data compiled by Bloomberg. (…)
Just when the Fed starts tightening, inflation and financial markets are already pressing on the brakes:
This Is No Century for Optimists. Can It Change? War in Ukraine and the return of inflation won’t help equity risk premiums rediscover their mojo, which has flattened out in most of the world since the millennium.
John Authers:
One of the greatest investment books ever written, which shows up on the desks and bookshelves of countless successful investors, is Triumph of the Optimists, published two decades ago by Elroy Dimson, Paul Marsh and Mike Staunton, a trio of British academics then working together at London Business School. A massive work of data analysis, it aimed to build a history of stocks, bonds and bills for the whole 20th century, across the globe, to measure the equity risk premium — the average extra annual return compared to bonds or bills that investors gained by taking the risk of buying stocks. (…)
Thankfully, Dimson, Marsh and Staunton annually update the “Triumph of the Optimists” database in the Global Investment Returns Yearbook, which for many years has been sponsored by Credit Suisse AG. (…) Its coverage of the previous 120 years provides some very good ideas on how long-term investors should navigate this terrifying juncture. You can find out much more about it on the Credit Suisse website here. (…)
- When real yields are low, it’s a bad time to buy stocks
- Inflation Is Bad For Your Investments
This might seem blindingly obvious, but it’s surprising how much sell-side research over the last few months has attempted to deny it. In the short term, equities are not a good inflation hedge. But they do perform better than bonds in all but the most intense periods of deflation, and they generally beat inflation in the long run. You just have to be prepared to hold them until well after inflation has abated. This is mighty relevant at present, as inflation is its highest in four decades across much of the developed world, and the Ukraine-driven surge in commodity prices will likely keep prices rising for a while.
- Rate-hiking cycles are also really bad times to buy stocks
(…) So, some conclusions. A sweeping look at history confirms that this looks bad. A period of high inflation and rising rates, starting with negative real yields, is a time when we can expect returns for stocks to be about as bad as they ever are — while bonds should be even worse. Throw in war, and it’s worth avoiding combatant countries, and particularly those that seem likely to lose. Any buying opportunities in Ukrainian and Russian equities are probably yet to come. Diversifying geographically — and at this point that particularly means outside the U.S. — should help, but not as much as we might hope.
However, over the last 120 years, which have seen some moments in history considerably darker than even this one, long-term equity investment has generally paid off. Getting out of the stock market altogether is a bad idea, particularly for those with a long time horizon. As equities and bonds both look challenged, it makes sense to go searching for opportunities in real assets, led by commodities. (…) But unfortunately, there’s no great historical support for the notion of diving into the thick of it now with some big contrarian bets.
Yesterday, Lowry’s Research commented that “Despite very heavy volume, climactic selling was not observed”. So far, de-risking has hit story stocks very hard. Growth stories are always interesting, but profitable growth is what, eventually, matters.
The S&P 500’s 13/34–Week EMA Trend is not appealing, is it?
China Warns U.S. Over Forming Pacific NATO, Backing Taiwan
(…) The senior diplomat repeatedly alluded to the U.S. as the source of problems with countries around the globe and issued some of China’s most pointed warnings yet against calls to expand U.S. ties with Taiwan.
“This would not only push Taiwan into a precarious situation, but will also bring unbearable consequences for the U.S. side,” Wang said on the sidelines of the National People’s Congress in Beijing, later adding: “Taiwan will eventually return to the embrace of the motherland.” (…)
“Beijing talks a lot about the importance of upholding international order, stability, respecting sovereignty,” Blinken said. “But from its coercion of Vilnius to its failure thus far to condemn Moscow’s flagrant violation of the sovereignty and territorial integrity of Ukraine, today and in 2014, Beijing’s actions are speaking much louder than its words,” he added, referring to Moscow’s earlier seizure of Crimea. (…)
Wang passed up another opportunity to criticize Russia’s military action or call it an “invasion,” instead saying that ties between the two countries remained “rock solid.” (…)
“No matter how precarious and challenging the international situation may be, China and Russia will maintain a strategic focus and steadily advance our comprehensive strategic partnership and coordination,” he said. (…)
“China is prepared to continue playing a constructive role to facilitate dialogue for peace and work alongside the international community when needed to carry out necessary mediation,” Wang said, stopping short of clarifying whether Beijing would mediate between Kyiv and Moscow. (…)
“China’s relations with the West look set to deteriorate further unless Beijing puts more pressure on Moscow.”
Note that the BLS revised its December-January numbers by +92k. In its January release, the BLS had revised November and December by +709k. In just the last 2 months, we found that between November and January the economy generated 1,716M jobs or 572k per month rather than the 915k or 305k per month originally released. That is a +88% revision! 
All this was before Ukraine, however. Another game changer. Inflation is the most immediately impacted data, right within a fully employed economy.
The average U.S. price of regular gas broke $4/gallon ($4.065) for the 
