Investment Newsletter – March 2022
As of 3 March 2022, WHO’s leader insisted that the pandemic is far from over, as the virus continues to evolve, and the world continue to face major obstacles in distributing vaccines, tests and treatments everywhere that are needed. Despite there is a decline in the global cases, it is warned that the case rate was certainly an underestimate due to the dramatic drop-off in testing. On jabs, the WHO’s latest figures show 23 countries are yet to fully immunise 10% of their populations, while 73 countries are yet to achieve the 40% coverage target set for the start of 2022.
The war in Ukraine will exacerbate the negative supply shocks that are already in place due to COVID-19. Worsening bottlenecks will combine with rising inflation to produce a contraction in global growth. Russia produces 12% of the world’s oil supply and exports 18% of the world’s wheat consumption. Ukraine accounts for 25% of global wheat production. Sanctions and war will serve to slow the economy further and send prices for these vital commodities even higher.
The swoon in US GDP will occur after the Fed has just finished printing USD 4.5 trillion over the past two years and with the national debt vaulting over USD 30 trillion due to the massive increase in government deficits in the wake of the COVID-19 pandemic. Such borrowing helped send the government’s debt to GDP ratio soaring to 125%. For perspective, that ratio was just 53% back in 1960 (Fed Fund Rate of 4.0%), and only 58% as recently as 2000 (Fed Fund Rate of 6.9%).
Fed Chair Jerome Powell is in a conundrum and from which there is no innocuous outcome. If the Fed gets overly concerned about slowing GDP due to the conflict in Ukraine, it could, for the most part, shelve its plans to raise rates. But that would risk propelling inflation even further away from Powell’s stated 2% target, which now has exceeded by 3.95 times.
Worst case scenario is to continue to keep the monetary policy loose and risk an intractable rise of inflation which would shrink the country’s GDP with the complete loss of confidence and credibility of the central bank. Or best case scenario is to tighten the monetary policy enough to deflate the massive bubbles in bonds, real estate, and equities. Either strategy is now destined to end in disaster for the market and economy, which is a recession or morph into a depression.
China is targeting slower economic growth of around 5.5% this year as a property downturn and lacklustre consumption cloud the outlook for the economy. To spur growth, the central bank has cut interest rates and banks’ reserve requirement ratio, with more easing steps expected. Overall, China has pledged to keep money supply and total social financing growth basically in line with nominal economic growth this year.
Furthermore, the current level of pessimism priced into emerging markets has driven valuations to levels that provide more than adequate compensation for these risks.
