LAWRIE WILLIAMS: Equities, bitcoin have had their fun. Day of reckoning nears.
The past couple of days have seen something of a rally in equity and bitcoin valuations despite seemingly ever-increasing evidence that inflation is still running strong and recession is waiting in the wings. Global economies look to us as though they may now be stuck in an ever-increasing downwards spiral with no obvious way out. Central banks are paying lip service to moves to supposedly normalize inflation levels, but with little, or no, effect.
We are probably already in a global stagflation phase and inevitably moving into a serious period of global recession. Equities may thus be caught in something of an impasse inevitably leading to a continuing weaker price environment. Their days of seemingly ever-rising prices may now well be behind them for months, if not years, to come.
The seeds of this inflation-dominated downturn had been sown with the measures taken virtually worldwide to try and halt the spread of the global Covid-19 pandemic, and the resultant deaths, as the world struggled to find vaccines and mitigatory medications to bring it under control. As these began to take effect and many of the restrictive measures were removed, the global economy started to surge again, but this recovery was hugely inflationary in its own right as businesses sought to make up lost profits and resume some form of normality. This led to price increases almost across the board, supplemented by serious supply chain issues with businesses all trying to re-stock at the same time.
But then came the Russian invasion of Ukraine adding a whole additional parameter to the inflationary equation. This not only impacted adversely the global supply of some key products directly, but the West, and its allies, imposed economic sanctions on Russia – one of the world’s biggest producers and exporters of many key industrial and agricultural commodities, thus further adding to global economic pressures. With no sign of an end to the Russia/Ukraine conflict in sight and with Russian sanctions and tit-for-tat retaliatory measures continually being extended, inflationary pressures are probably getting worse before they even begin to get better.
Two of the most affected sectors of the Russia/Ukraine war, are energy and agriculture, both of which have a huge knock-on effect on the global economy. Russia is one of the world’s top producers and exporters of oil and natural gas and Russia and Ukraine between them of wheat, other grains, cooking oils and fertilizers, none of which the world can do without. We are already seeing big interruptions in supply to some of these and global prices are soaring as a result as importers of these products struggle to find alternate suppliers. Further consequential price rises are almost certainly in prospect, suggesting no near term end to global inflation.
While equities and bitcoin both seem to be trending downwards again today, there does seem to be a little respite for gold, although the other precious metals were all seeing falls at the time of writing, but mostly not by nearly as much as equities or bitcoin in percentage terms. Gold had put on a few dollars and was perhaps at last seeing some safe haven benefits from the falls in other asset classes, although the gains at the time of writing were insufficient yet to confirm this as a trend. Cryptos in particular were down quite heavily, though - between 5 and 9 percent.
As we have stated before we do retain a degree of confidence in gold as an inflation hedge given its investment advantages tend to be enhanced in a negative real interest rate environment. As long as inflation remains enhanced, and we don’t see Fed policy doing much to change this in the medium term, negative real rates are likely to persist to gold’s advantage. Whether silver and the pgms follow suit remains to be seen given they are, nowadays, all primarily industrial metals and thus far more dependent on the overall state of the economy.