20 May INFLATION AND MULTIPOLARITY
I do not think it is a stretch to write the ties that bind the global economy together and delivered goods in abundance across the world is unravelling at a remarkable pace.
Today, Russia’s invasion and China’s COVID zero lockdowns are disrupting supply chains further pushing inflation to forty-year highs.
War and plague, however, do not last forever but such has exposed a much deeper issue and that the world is increasingly divided along geopolitical fault lines, believing it may only get worse.
Several years ago, I was nominated to present at the NSA Conference hosted by the Army War College about the rise of Economic Nationalism. The crux of my presentation was the global economies were/are at the beginning of the great rewind of the multipolarity and interdependency structure that commenced with the fall of the Berlin Wall, the collapse of Russia and the entrance of China into the WTO.
Inflation and cost of goods sold declined dramatically as China and the former Eastern Bloc provided a billion low-cost workers to cheaply produce product. Moreover, for exchange of lenient terms for intellectual property rights, China opened its markets to westerners. It was the ultimate synergistic environment.
Nationalism, patriotism and desire for global domination has been around since the dawn of mankind and such trumps the new economic thesis of multipolarity where war is viewed as obsolete because of economic interdependence.
As indicated above this synergistic environment is unravelling at incredible speed with perhaps the impending inevitable default of Russian sovereign debt as a perfect example. [Note Russia last defaulted in 1918 during the Bolshevik Revolution]
Interest rates and inflation are the primary determinate of valuations. For several years (2017 -2022) the world was awash with over $15 trillion of negative yielding debt, the statistical probability of such is 0.0009%. In other words, it was close to impossible.
Today inflation and interest rates are rising as this multipolarity collapses and assets are repricing this collapse. Negative interest rates are now nonexistent, and I will argue the odds of interest rates and inflation returning to previous years’ levels are extraordinarily low given this dramatic unravelling of global interdependency.
The question at hand is where will inflation and interest rates stabilize? Perhaps the only certainty to write real interest rates are around historical lows and either prices or inflation must decline to return to some sense of normalcy.
Either of the above may increase volatility.
Speaking of volatility, markets were again volatile. A late day selloff sent averages down anywhere between 0.25% and 0.75% over concerns of rising prices and tightening monetary policy. Treasuries sold off and the curve steepened.
What will happen today? Will options expiration impact trading?
Last night the foreign markets were up. London was up 1.85%, Paris up 1.36% and Frankfurt up 1.40%. China was up 1.60%, Japan up 1.27% and Hang Seng up 2.96%.
Futures are up about 1% following Chinese efforts to stimulate its economy. The 10-year is off 6/32 to yield 2.87%.