Opinion: Inflation will be higher for longer — and you’re not going to like what comes next


The list of things investors need to worry about is growing. In fact, when you are full of feelings of success or failure is when you want to harden your process to make sure that emotions do not mess with your head and decision making.

At the top of this list is inflation, which seems to be everywhere. Reducing inflation is not easy, and the challenge for central banks is even greater because of six intertwining factors that could be putting the global economy on the path to stagnation.

Let’s look at six factors that are now shaking the economies of the United States and the world that set the stage for stagnation:

1. Oils

Even before the coronavirus pandemic, the world oil supply CL00,
+ 0.93%
and natural gas NG00,
+ 1.02%
it was constrained by a fall in investment in the sector, caused by low oil and natural gas prices and the fall in oil prices in disgrace among ESG supporters. The pandemic caused a further drop in investment in the sector. At that time, the Russian invasion of Ukraine forced the world to excommunicate the third largest producer of petrochemicals.

The oil market has a slightly different dynamic from the natural gas market. Oil is a consumable commodity and is easily transported by tanker trucks and can therefore be (relatively) easily redirected from one customer to another. For example, if China used to buy oil from Saudi Arabia and now buy oil from Russia, the oil that China stopped buying from Saudi Arabia can now be bought by Germany. That said, Russia produces heavy crude oil and light Saudi crude oil, so refineries have to be reconfigured, and that takes months.

Oil sanctions will only have an impact on the Russian economy if everyone stops buying Russian oil. If all countries adopt sanctions, then about 8 million barrels of daily oil exports will be withdrawn from the market. That’s a lot of oil, considering that the world consumes about 88 million barrels a day.

It is unclear whether China and India, the main and third largest oil importers, respectively, will continue to buy large quantities of oil from Russia, as doing so risks damaging their relations with the West. Neither country wants the West to tell it what to do. They have their own economic interests to consider, but their trade with the US and Europe is significantly larger than with Russia.

It seems that both countries have been slowly moving away from Russia. For example, the war in Ukraine is a horrible announcement for Russian weapons, and there is a good chance that India will decide to switch to Western weapons, which would bring it closer to the West.

In the short term, Russia’s oil supply to the world market is likely to decline. In the long run, the outlook looks even worse for Russia. There is a good reason why Western companies were involved in Russian oil projects, while a great love for the West was not the motivator that drove Russia to share oil revenues with BP BP.
-0.09%
and Exxon Mobil XOM,
+ 0.54%.
Western companies provided much-needed technical expertise to the highly challenging Russian oil and gas fields. With Russia’s exit from the West, long-term oil and gas production is likely to decline, even if China and India continue to buy Russian oil and gas.

2. Natural ghow

Let’s move on to the natural gas market. Sending gases is much more complicated than sending liquids. Natural gas can be transported in two ways: by pipelines (the cheapest and most efficient way, but it takes years to build) and by LNG vessels. LNG means liquefied natural gas: the gas cools to -260F and becomes liquid. Western Europe, especially Germany, is heavily dependent on Russian gas, which is now transported to Europe via pipelines.

German politicians, in their eagerness to turn green, abandoned nuclear energy, which produces zero CO2, switched to intermittent “green” wind and solar energy (and turned to raw coal) and they tied their future to a shirtless Russian dictator. I’ve talked about this topic before; you can read it here.

Some smaller European countries are abandoning Russian gas. Germany and Italy, the main consumers of Russian gas, promise to be able to break away from Russian gas in less than two years. This trend will continue; it just won’t happen overnight (or in two years). Call me skeptical, but I think it will take a long time for Europe to completely abandon Russian natural gas, as the construction of LNG terminals takes years, and also the increase in natural gas production.

Oil and natural gas prices are likely to remain high or even rise in the coming years, and U.S. natural gas and oil production is likely to have to rise substantially.

3. Food

Russia and Ukraine together produce about 15% of the world’s wheat W00,
-2.98%
supply. Both countries account for about a third of world wheat exports (or about 7% of world wheat consumption). Russia has banned wheat exports. Ukraine’s planting season has probably been interrupted by the war. World wheat supply may fall by up to 7%. It seems like a lot, but it’s not out of the historical volatility caused by droughts and other natural disasters, which have historically pushed up wheat prices by a few percent.

High fertilizer prices will cause a significant increase in the prices of all calories, from corn to avocados and meat.

This is not my main concern. I have been concerned about rising nitrogen and potassium fertilizer prices since the start of the war. Russia and Belarus, respectively, are the second and third largest exporters of potash used to make potassium fertilizers (Canada is the largest producer). Nitrogen fertilizer is made from natural gas. Natural gas prices have risen sharply. High fertilizer prices will cause a significant increase in the prices of all calories, from corn to avocados and meat.

Food inflation disproportionately affects poor and rich countries. American consumers spend 8.6% of their disposable income on food (since 17% in the 1960s). In poor countries this figure is significantly higher. For example, the average Ukrainian spends 38% of disposable income on food. Food prices have gone up and I’m afraid we haven’t seen anything yet.

4. Interest rates

Higher interest rates make all financed goods more expensive, from washing machines and dryers to cars and houses. Over the last decade we have become accustomed to cheap and plentiful credit. If inflation continues to remain high, cheap credit will become a relic of the past.

Now, if you add up the rising energy prices (gasoline and heating), food inflation and the higher cost of everything to be financed, you will see how the consumer is tightening from all angles. directions. My sense is that the inflation figures massaged by the government are low, despite being in records for several decades. A more realistic figure is much higher, as suggested by government-adjusted import and export inflation figures, which range from 12% to 18%.

5. Supply chain issues

Another culprit for higher inflation is supply chain problems. China is going through another partial closure of its economy. Meanwhile, the coronavirus has not forgotten us. China has suffered one of the lowest per capita numbers of COVID-19 infections and deaths. The downside to this is that China has a very low herd immunity. China has made vaccines locally, but they are not very effective, and China refuses to import Western vaccines.

China’s “zero Covid” policy is being tested. Because China does a lot of the things we consume, they will do less. China’s “transitional” supply problems will persist and inflation will rise.

6. Deglobalization

Finally, the war in Ukraine has accelerated deglobalization. Globalization was a great deflationary tsunami. The pandemic exposed the fragility of our closed inventory just in time and our global supply system. The war in Ukraine reminded the West that the global trading system is based on the assumption that we are not going to war with our trading partners. The Ukrainian war broke this assumption and accelerated the pace of selective deglobalization.

Having these factors together produces a likely outcome: higher prices for everything and a subsequent period of crippling economic stagnation.

Vitaliy Katsenelson is CEO and Investment Manager of Investment Management Associates. He is the author of Active Value Investing: Making Money in Range-Bound Markets and The Little Book of Sideways Markets..

Here are links to more of Katsenelson’s views on the inflation picture (read, listen) and how to invest in inflationary times (read, listen). For more information on Katsenelson’s investment, go to ContrarianEdge.com or listen to his podcast on Investor.FM.

Month: Inflation can be much lower than anyone thinks, even the Fed

Also read: “I feel like I’m reliving the summer of 2008”: strategist David Rosenberg sees bearish market plunge S&P 500 to 3,300



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