Macro-changes and Inflation 2.0
Of money printing, the return of inflation and war
As I said previously, these have been fairly active weeks on international matters. The following post gives you a quick-ish recap.
I want to give my readers a few macro forecasts. Not because I think macro is that predictable, but mostly because any investors want to avoid major blunders in that arena.
I could have gone into detail about the Fed balance sheet, SVB, bond losses, and so on. But everybody seems to have beaten this topic to death already.
Instead, I want to look beyond the immediate news cycle, and what is the bigger picture.
I honestly think this is the real potential of this newsletter. Not getting mired in exclusive economics, investing, geopolitics demographics, etc…
But synthesize all of them into actual forecasts, risk management strategies, and investing ideas.
So I will stick my neck out and risk forecasts that might turn correct… or not, time will tell.
Let’s get to it!
Central banks & Inflation
We experienced a surge in inflation for a few different reasons happening all at once:
Supply chain issues from lockdowns and from re-openings.
Energy shock from the Ukraine war
It also combined to an underlying understanding on energy capex out of short-lived shale oil deposits.
And the destruction of cheap, reliable supply, like closing nuclear power plants, to be replaced with unreliable renewables.
Excess money creation from Covid stimulus, guaranteed loans
A phenomenon accelerated by further Build-Back-Better/Inflation Reduction Act forecasted stimulus.
And it can be on the backdrop of one of the craziest speculative mania in history (the “everything bubble”: real estate, unprofitable tech, SPACs, crypto, NFT, Metaverse…).
Calming Inflation
Supply chain shock is by its very nature temporary, as shown in the crash in demand for NVidia cards for example. So that is a big contributor to inflation coming down from its peak.
Russia's energy has for a big part found new buyers, and the part that did not (mostly gas) is only recent, and affected mostly Europe. This created a recession for Europe’s industry, reducing global demand.
Pricing out of LNG markets in poor countries like Pakistan, Sri Lanka, or Bangladesh also reduces overall demand.
So energy is far from solved. But for now, it stops contributing to more inflation.
This will come back as a problem when production keeps declining from too low capex, but for now, it was still hidden by the USA selling strategic oil reserves, China’s lockdowns, and Russia not yet closing the oil fields.
Meanwhile, interest rates kept rising, speculation abated, and stimulus has been slow to come, stuck in bureaucracy and false promises (US student loans?).
2008 Redux?
The last straw that could calm down inflation is an unfolding banking crisis, likely leading to more caution and fear of a recession.
In theory, this could be highly deflationary and remove the last ongoing pillar of inflation.
Keep an eye on the EU banking sector, especially:
Germany (Deutsche Bank?): heavy industry leaving due to energy prices.
Sweden: Mortage at 90%+ variable rates, squeezing households hard.
France: Social instability, poorly managed banks.
Spain/Italy: same as France, but maybe worse. Focus on Unicredit which also has the gall to still do business in Russia. Unlikely to go unpunished for long.
Inflation 2.0
Now does this mean inflation is over?
Very unlikely.
The easy part, solving the supply chain crisis, is over.
The energy supply is not solved at all, just on pause. Of course, if we get a massive financial crash it might crash oil. But this is true for virtually everything, so I fail to see how this is an argument against allocating capital toward energy.
So the energy supply problem is there to stay and push prices up, with higher energy costs not done worming their way up the value chain into cars, computer chips, boats, infrastructure, etc.
The banking puzzle
The banking part is trickier.
On one side, it is VERY clear regulators are more reactive and equipped to deal with a 2008-style crisis.
Just look at the speed at which SVB got “saved”.
And how Swiss national laws were re-written on a Saturday evening to magically save Credit Suisse with its bondholders’ money.
On the other side, there are a few … unsettling stories around:
How Asian banks in Hong Kong and Singapore canceled all their employees’ holidays and went on a 7/7 schedule to handle the flow of money fleeing Europe (and USA?)
A surprising strengthening of gold price AND crypto, usually the first to crash at the first hint of a recession. Does that point out a new persistent behavior of flight to safety out of fiat during a crisis?
How many countries on Earth seem to have suddenly activated a long-planned “let’s reduce dollar exposure” operation with a new common currency, swap deal, local trade in local currencies, etc…:
Russia, Iran, Brazil, Argentina, South Africa, China, India, Indonesia, the whole ASEAN (10 countries), Saudia Arabia, UAE, Qatar, Kenya,…
And that is not including all the countries joining the BRICS+ or SCO requests, like Mexico, Turkey, Egypt, Algeria, Uruguay, Bangladesh, Nicaragua, Nigeria, Senegal…
Or outright antagonizing the USA, like Honduras ending recognition of Taiwan, Chad stealing Exxon’s assets, etc…
The country de-dollarizing the quickest is definitely China. Almost as if they don’t want hundreds of billions to be stolen, like what happened to Russia.
Of course, at this point, the Chinese’s treasuries holdings are only 1 year’s worth of commercial balance. But still better to force the Fed to buy (aka monetize the debt) from the excess bonds no longer absorbed by Asia.
This is a complicated story because if money flows out of the Western banking system, it could create a real banking crisis that would kill any inflation possibility.
But if a banking crisis occurs, money printing and new stimulus will go into overdrive.
My bet is for a while it will just hang there, with a lot of volatility, but not much else.
At the end of the day, will the Western central banks let the financial system fail? Unlikely. It’s the same people one day on the board of a bank and the next day working at the Fed or the Treasury.
They will give up fighting inflation instead and restart the money printer.
People will bicker and argue if this or that intervention is “real” money printing or not and try to sound smart in discussing the plumbing of international finance, but it always ends up the same way.
Besides, inflation is nice for debtors. Who are the biggest debtors?
The same governments who decide the central bank policies.
Yeah… I am sure they will want less power and to cut down budgets :)
Is the dollar dying?
Yes. Kind of. Not really.
I would be very cautious about all the claims of the imminent doom of the dollar.
Yes, it is losing ground. Surprisingly quickly.
It used to be that selling your oil for NOT dollars was the quickest way to get Sadam-ed or Gaddafi-ed.
Now the Saudian will sell oil to Kenya for Kenyan shilling (who in the audience knew the name of Kenya’s currency? For sure I didn’t).
It is also EXTREMELY unlikely to go on so easily.
First, you do not change all the world’s trade contracts, foreign investments, currency exchanges, alliances, and such in a few months.
Localizing turncoats like Saudia Arabia maybe. But worldwide revolution against the US hegemony will not be.
Second, will USA/NATO/EU just sit there and do nothing? Really?
A lot of places will need some “democracy” and “human rights” soon I suspect.
“Funny” how years of slaughtering Yemeni children was NOT a problem with Saudia Arabia.
—>“DEMOCRACY!!!”
The Catalyst Ahead
Overall, we should expect a very messy few months ahead, but probably not much really happening.
Of course, I speak in general, if you live in Honduras or Mexico, you might feel the heat of “democracy” quite close to home.
I think the more serious catalyst will come from Ukraine’s battlefield. A few admissions slipped by recently breaking the previous narrative.
The supposedly “unimportant” Bakhmut must be held at any cost.
From Zelensky himself:
Even if since January “US and Western officials are urging Ukraine to shift its focus from the brutal, months-long fight in the eastern city of Bakhmut and prioritize instead a potential offensive in the south“
Meanwhile, the West is tragically unable to keep up in an industrial war despite having 15x more defense spending.
Ukrainian forces running out of shells, equipment in fight for Bakhmut
Ukraine Is Firing Artillery Shells Faster than NATO Members Can Replace Them
Ukraine is running out of ammunition as prospects dim on the battlefield
Going to war? Good news! The United States is 13 years behind in ammunition production, NYT reports.
A failure paid in Ukrainian disposable canon fodder blood…
Why is the West unable to keep up? And might, maybe, eventually, in 2-3 years just catch up to Russian levels? A country with a fraction of the GDP and population?
Well, it might have something to do with society's focus as a whole:
I f***ing kid you not…
And I can guarantee you that not one general, defense minister or anyone responsible will lose their job over such incredibly inept use of bloated defense budgets.
No inventory, no spare capacity, nothing but fancy new toys, and comfy retirements as chairmans of defense companies.
When Ukraine’s Army Retreats
There are also persistent reports that Russia’s air force is increasingly bold (aka, weakening air defenses) and use modified “dumb” bombs turned cheaply into GPS-guided (technically GLONASS guided I guess) to vaporize the Ukrainian defensive positions.
It seems there are 3 possible outcomes in the next few months:
Retreat from Bakhmut, the smartest choice, but it would break the “Ukraine is winning” narrative.
Plowing tens of thousands of soldiers to die to lose the city anyway.
Manage a counteroffensive somewhere, somehow, with a few dozen modern tanks under heavy artillery fire.
It is getting even uglier and something will break.
You can expect panic reactions to set in then. Most likely, a rushed acceleration of military aid. Maybe, God forbid, a direct entry of NATO. Or maybe just Poland?
For sure, balanced budgets or reining in inflation will be forgotten for good.
In my opinion, THIS is likely when we see many more “crises” accelerate.
Non-Westerners might prefer their assets out of countries at war, which would crash eurozone banks and hurt the US banking sector.
end of QT, restarting of QE, and the need to “keep the democracy stable in their struggle against autocracy”
The “1 trillion defense budget in sight” will be memory, replaced by something a LOT bigger.
Rationing energy usage, due to both wartime and climate change.
Spiraling sanctions on China, likely for supplying Russia with weapons (an accusation already ongoing for a few weeks).
aka “The Supply Shock Strikes Back”
Inflation is for me a given, but I suspect the timing will frustrate a few, with some more months until Ukraine exhausts its reserves in a doomed and absurd defense.
When we combine unleashed money printing, trying to sanction China, and the restart of the energy crisis, this will make the last bout of inflation a walk in the park.
Next? Inflation 3.0
I expect there will be a third stage of inflation waves that comes later, from an interruption in commodities supplies.
Think of the 1970s oil shock, but for oil, gas, metals, grain, food, wood, etc…
As I said before:
By gathering in one bloc most of the commodities, this turns the BRICS into a supercharged version of the 1970s OPEC. They could form a producer cartel for EVERY necessity: LNG, oil, soybean, coffee, chocolate, sugar, iron, copper, aluminum, lithium, rare earth minerals, etc.
When I said that, A MONTH AGO, the ASEAN had not discussed conducting internal trade without the dollar, and Mexico was not asking to join the BRICS.
So I would also add many semi-transformed products, like car parts, plastic widgets, packaging, refined silicon, etc…
The “Third World” or “Global South” has always been very bitter about hearing how rich in resources their countries are, and how poor their people stay.
In the last inflation shock, the 1973 oil crisis came on the heels of a worsening Vietnam war which would end in 1975.
Smelling weakness, key commodities producers weaponized their leverage against the West.
At the time it was oil, as the West still had much better control of other commodities and more domestic production.
This time, after 30 years of closing mines, refineries, and nuclear power plants, this might be called something like “the 2025-2026 commodities crisis”.
The Global South is gathering to collectively use its leverage.
Especially RIGHT WHEN the West NEEDS commodities for more guns, tanks, planes, ammo, artillery shells, missiles, frigate, cruisers, submarines,...
Industrial wars are logistics wars.
Nothing TikTok data centers and crypto banks can help with.
Investing takeaways
Energy, commodities, energy, commodities, energy, commodities.
Some more energy & commodities.
Defense, discounters, staples.
Neutral countries are best, in the sense of “not active participants in any Eurasian or Pacific wars”. That’s a very big chunk of the world out. Non-Western companies as well, Chad expelling Exxon and Mexico nationalizing a lot of resources is just a starter.
So South America definitely seems to coalesce my attention lately.
Ideally, state-owned companies, as the government will be happy to keep dividends flowing to finance anything they fancy + it’s already mostly nationalized.
Like Petrobras confirming it plans to keep a high-dividend yield.
Australia is an option as well.
I have a company in mind already, let’s see if I make that report before or after a more defense-focused one. Probably after.
I also expect similar things for rather some time.
I just do not know how much larger milit.budget is plausible, given the level of existing debts, inflation, missing production capacity (from workers all to factories missing)
end of QT, restarting of QE, and the need to “keep the democracy stable in their struggle against autocracy”
The “1 trillion defense budget in sight” will be memory, replaced by something a LOT bigger.