Putin declares war on Europe

Vladimir Putin’s invasion of Ukraine is an effective declaration of war against Europe.

This will no more stop at Kyiv than Hitler stopped at the Sudetenland.

Tragic sites of refugees fleeing Russian bombing and helicopter-borne invasion forces occupying Hostomel Airport military airfield, 15 minutes outside the capital.

Twitter

Twitter

Twitter

All of this could have been avoided if the West had shown more resolve.

Kicking the can down the road

The West has been kicking the can down the road for the past 15 years hoping that the problem would go away. Ever since Vladimir Putin laid out his agenda at the Munich security conference in 2007, the West has tried to buy him off with reset buttons and lucrative gas contracts, looking the other way as he embarked on his expansionist plans, starting with invasion of Georgia the following year.

From Ambassador Daniel Fried and Kurt Volker in Politico, seven days ago:

What is more surprising is how the U.S. and Europe, despite Putin’s obvious warning in Munich and Russia’s many actions over 15 years, have nonetheless clung to the notion that we can somehow work together with Putin’s Russia on a strategic level. It is finally time for the West to face facts. Whether or not Putin launches a major new invasion of Ukraine, he has rejected the post-Cold War European security architecture and means it. He is on a deliberate and dedicated path to build a greater Russia, an empire where the Soviet Union once stood…..

Following the speech, Putin matched his words with actions, dismantling the structures designed to keep peace in post-Cold War Europe. Russia formally announced in July 2007 that it would no longer adhere to the Conventional Armed Forces in Europe Treaty. It continued to reject the principle of host-nation consent for its troop presence in Georgia and Moldova, and began ignoring Vienna Convention limits on troop concentrations, exercises and transparency.

Judge a tree by the fruit it bears

Europe continued to build a trade relationship with Russia, in the hope that prosperity would mellow Putin. Instead the Kremlin used its oil and gas profits to rearm and modernize its military while cracking down on political opposition and a free press. Deaths of journalists and opposition politicians climbed. Eastern NATO leaders who repeatedly warned the West about the need to confront Russia were dismissed as “warmongers”.

By this stage, the Kremlin had even taken its war against opposition figures abroad, with the murder of Alexander Litvinenko in 2006.

Alexander Litvinenko

In 1998, Litvinenko and several other FSB officers had publicly accused their superiors of ordering the assassination of the Russian oligarch Boris Berezovsky. Litvinenko was arrested the following year but acquitted before being re-arrested. The charges were again dismissed and Litvinenko fled with his family to London where they were granted asylum in the UK. He later wrote two books accusing the Russian secret services of staging the Russian apartment bombings in 1999 and other acts of terrorism in an effort to bring Putin to power. He also accused Putin of ordering the assassination of the Russian journalist Anna Politkovskaya in 2006. Litvinenko died of polonium-210 poisoning that same year, in London.

A UK public inquiry concluded in 2016 that Litvinenko’s murder was carried out by the two suspects and that they were “probably” acting under the direction of the FSB and with the approval of president Vladimir Putin and then FSB director Nikolai Patrushev.

The Obama Reset

On his election in 2009, Barack Obama sought to reset the relationship with Russia, as if the West was to blame for:

  • the attempted assassination of Ukrainian president Viktor Yushchenko during his 2004 election campaign — he was poisoned with a potent dioxin that disfigured him but later made a full recovery;
  • widespread denial-of-service cyber attacks on Estonia in 2007; and
  • invasion of Georgia in 2008.

The reset failed badly, with Russia annexing Crimea and invading the Donbas in 2014. Next was Syria in 2015. Responses by the West, including limited sanctions, proved ineffective.

The Salisbury poisonings

In 2018, Russia was the first state to employ chemical weapons against private citizens in a foreign country. In Salisbury, England, Sergei Skripal and his daughter Yulia, a Russian citizen, visiting him from Moscow, were poisoned with a Russian-developed Novichok nerve agent and admitted to hospital in a critical condition. UK Prime Minister Theresa May accused Russia of responsibility for the incident and announced the expulsion of 23 Russian diplomats in retaliation. A former Russian intelligence officer, Skripal had settled in the UK in 2010 after his conviction on espionage charges in Russia before being exchanged in a spy swap. Both Skripal and his daughter eventually recovered. Moscow refused to cooperate in the interrogation of the two prime suspects, identified by Bellingcat as Alexander Mishkin, a trained military doctor, working for the GRU, and decorated GRU Colonel Anatoliy Chepiga.

GRU Colonel Anatoliy Chepiga and Alexander Mishkin, a trained military doctor, working for the GRU

Conclusion

The signs have been evident for a long time but were largely ignored.

This was always going to end badly. The longer that the West delays, the worse the eventual toll in lives and human suffering.

Former Swedish PM Carl Bildt sums up the situation:

Carl Bildt

The Putin invasion of Ukraine that we now see unfolding is the worst outbreak of war that we have had since Hitler invaded Poland in September of 1939. The same motives, the same techniques, the same lies leading up to it. What will happen now remains to be seen. Sanctions will have to be imposed, although that particular deterrence has obviously failed, but it was good to try. We must help the fight in Ukraine. We must treat the Putin regime in the way that it deserves, in all respects. We are heading for bleak days when it comes to the security of Europe. Transatlantic security will be absolutely key.

A slow-motion train wreck

Facebook parent Meta’s shares fell 20% after hours as it said revenue growth will slow, partly because users were spending less time on lucrative services. (WSJ)

Meta Platforms (FB)

Facebook lost about half a million global daily users in the fourth quarter of 2021 compared to the previous quarter, according to the quarterly earnings report of Meta, its parent company. That might not seem like a major drop relative to its under 1.93 billion total daily active users, but it represents a low point for a metrics-driven company whose user base long grew at a rapid pace across its different apps. The statistic shows how Meta has struggled to stay relevant to younger users, many of whom are drawn to competing apps like TikTok. (Vox)

Facebook/Meta’s dissapointing performance is not an isolated problem. Tesla (TSLA), the darling of retail investors — trading at 22 times sales and 93 times forward earnings — is also staring into the abyss. Breaking primary support at 900 last week, TSLA quickly recovered — indicating a false break — but is again testing the 900 support level. Trend Index peaks below zero warn of selling pressure. Breach of support at 900 for a second time would confirm a primary down-trend. Initial target for a decline would be 600 — a 50 per cent fall from its recent peak of 1200.

Tesla (TSLA)

Jesse Felder shows how precarious the market situation is, with the median price-to-sales ratio at a record 3.5 times. Compare that to the Dotcom bubble, with a peak of just 2.0.

Median Price to Sales ratio

Warren Buffett’s favorite market valuation metric of market-capitalization-to-GDP is not quite as alarming, when you compare to the Dotcom peak in 2000, but nevertheless sounds a grim warning.

Market Cap/GDP

We consider MarketCap/GDP to be the most accurate long-term valuation metric available. By focusing on total stock market valuation relative to output, it avoids distortions caused by the financial trickery of stock buybacks and fluctuating profit margins caused by factors like the current supply chain issues.

Conclusion

This is like watching a slow-motion train wreck. The worst I have seen in nearly forty years in financial markets. The Fed may be able to postpone a market crash by several months but the eventual outcome is inevitable. The draw-down has the potential to be truly eye-watering, overshadowing the Dotcom Crash and Global Financial Crisis.

We are overweight Gold (including gold miners), defensive stocks, and key commodities and underweight high-multiple growth stocks.

Robinhood results warn of bear market

Robinhood Logo

More bear market signals, this time from stock-trading app, Robinhood. A favorite among retail traders, with more than 22 million funded accounts, trading boomed during the pandemic when stuck-at-home retail traders sought to trade with funds from government stimulus payments. Now stimulus is fading and the retail trading app faces sharp declines in trading activity.

Robinhood shares tank 15% after it loses active users, forecasts weak revenue

Robinhood gave a bleak revenue forecast for the first quarter of 2022 on Thursday as its latest earnings report showed a decline in active users. The newly public brokerage anticipates first-quarter revenue of less than $340 million, down 35% compared with 2021…..Monthly active users fell to 17.3 million last quarter from 18.9 million in the third quarter. (CNBC)

Dr Lacy Hunt, Hoisington Investment Management | The debt trap

From Dr Lacy Hunt at Hoisington Investment Management on the declining velocity of money:

M2 Velocity

The Fed is able to increase money supply growth but the ongoing decline in velocity (V) means that the new liquidity is trapped in the financial markets rather than advancing the standard of living by moving into the real economy…..

GDP/Debt

Money and debt are created simultaneously. If the debt produces a sustaining income stream to repay principal and interest, then velocity will rise since GDP will eventually increase beyond the initial borrowing. If advancing debt produces increasingly smaller gains in GDP, then V falls. Debt financed private and governmental projects may temporarily boost GDP and velocity over short timespans, but if the projects do not generate new funds to meet longer term debt servicing obligations, then velocity falls as the historical statistics confirm.

The increase in M2 is not channeled into productive investment — that fuels GDP growth — but rather into unproductive investment in financial assets. The wealthy invest in real assets, as a hedge against inflation, but these are mainly speculative assets — such as gold, precious metals, jewellery, artworks and other collectibles, high-end real estate, or cryptocurrencies — which seldom produce much in the way of real income, with the speculator relying on asset price inflation and low interest rates to make a profit. Many so-called “growth stocks” — with negative earnings — fall in the same category. Debt used to fund stock buybacks also falls in this category as their purpose is financial engineering, with no increase in real earnings.

In 2008 and 2009 Carmen Reinhart and Ken Rogoff (R&R) published research that indicated from an extensive quantitative analysis of highly indebted economies that their economic growth was significantly diminished once they become highly over-indebted.

…..Cristina Checherita and Philip Rother, in research for the European Central Bank (ECB) published in 2014, investigated the average effect of government debt on per capita GDP growth in twelve Euro Area countries over a period of about four decades beginning in 1970. Dr. Checherita, now head of the fiscal affairs division of the ECB and Dr. Rother, chief economist of the European Economic Community, found that a government debt to GDP ratio above the turning point of 90-100% has a “deleterious” impact on long-term growth. In addition, they find that there is a non-linear impact of debt on growth beyond this turning point. A non-linear relationship means that as the government debt rises to higher and higher levels, the adverse growth consequences accelerate……Moreover, confidence intervals for the debt turning point suggest that the negative growth rate effect of high debt may start from levels of around 70-80% of GDP.

…..Unfortunately, early-stage economic expansions do not fare well when inflation and interest rates are not declining at this stage of the business cycle, which is not the normal historical role, or the path indicated by economic theory. As this year has once again confirmed, in early expansion inflationary episodes, prices rise faster than real wages, thereby stunting consumer spending. The faster inflation also thwarts the needed continuing cyclical decline in money and bond yields, which are necessary to gain economic momentum.

…..The U.S. economy has clearly experienced an unprecedented set of supply side disruptions, which serve to shift the upward sloping aggregate supply curve inward. In a graph, with aggregate prices on the vertical axis and real GDP on the horizontal axis, this causes the aggregate supply and demand curves to intersect at a higher price level and lower level of real GDP. This drop in real GDP, often referred to as a supply side recession, increases what is known as the deflationary gap, which means that the level of real GDP falls further from the level of potential GDP. This deflationary gap in turn leads to demand destruction setting in motion a process that will eventually reverse the rise in inflation.

Currently, however, the decline in money growth and velocity indicate that the inflation induced supply side shocks will eventually be reversed. In this environment, Treasury bond yields could temporarily be pushed higher in response to inflation. These sporadic moves will not be maintained. The trend in longer yields remains downward.

Negative real yields

A negative real yield points to the fact that investors or entrepreneurs cannot earn a real return sufficient to cover risks. Accordingly, the funds for physical investment will fall and productivity gains will erode which undermines growth. Attempting to counter this fact, central banks expand liquidity but the inability of firms to profitably invest causes the velocity of money to fall but the additional liquidity boosts financial assets. Financial investment, however, does not raise the standard of living. While the timing is uncertain, real forward financial asset returns must eventually move into alignment with the already present negative long-term real Treasury interest rates. This implied reduction in future investment will impair economic growth.

….research has documented that extremely high levels of governmental indebtedness suppress real per capita GDP. In the distant past, debt financed government spending may have been preceded by stronger sustained economic performance, but that is no longer the case. When governments accelerate debt over a certain level to improve faltering economic conditions, it actually slows economic activity. While governmental action may be required for political reasons, governments would be better off to admit that traditional tools would only serve to compound existing problems.

Carmen Reinhart, Vincent Reinhart and Kenneth Rogoff (which will be referred to as RR&R), in the Summer 2012 issue of the Journal of Economic Perspectives linked extreme sustained over indebtedness with the level of interest rates…… “Contrary to popular perception, we find that in 11 of the 16 debt overhang cases, real interest rates were either lower or about the same as during the lower debt/GDP years. Those waiting for financial markets to send the warning signal through higher (real) interest rates that governmental policy will be detrimental to economic performance may be waiting a long time.”

Growth Obstacles

In 2022, several headwinds will weigh on the U.S. economy. These include negative real interest rates combined with a massive debt overhang, poor domestic and global demographics, and a foreign sector that will drain growth from the domestic economy. The EM and AD (Advanced) economies will both serve to be a restraint on U.S. growth this year and perhaps significantly longer. The negative real interest rates signal that capital is being destroyed and with it the incentive to plough funds into physical investment.

Demographics continue to stagnate in the United States and throughout the world……..Poor demographics retard economic growth by lowering household, business and state and local investment. This keeps intact the observable trend in numerous countries – extreme over-indebtedness reduces economic growth which, in turn, worsens demographics, which reinforces the weakness emanating from the debt overhang. William Stull, Professor of Economics at Temple University, makes the case that for nations’, “demographics is destiny” (a phrase coined by Ben Wattenberg and Richard M. Scammon), highlighting the importance of its critical secular growth in determining economic fortune.

Although fourth quarter numbers are not yet available, the global debt to GDP average for 2020-21 is almost certainly the highest on record for any two-year period. Transitory growth spurts, like the one Q4 2021, are unlikely to be sustained. The sporadic but weakening growth trend evident before the pandemic hit in 2019 will return, reinforcing the debt trap.

Inflation

The University of Michigan indicates consumer sentiment in the fourth quarter was worse than during the height of the 2020 pandemic and at the levels of the beginning of the very deep 2008-09 recession. Consumers cut back significantly on their buying plans as expectations for increases in future income slumped. To fund the sharply higher cost of necessities, households have been forced to reduce the personal saving rate in November to 6.9%, or 0.4% less than in December 2019. Needing to tap credit card lines undoubtedly contributed to the erosion in consumer confidence measures. Without the sizable cut in personal saving, real consumer expenditures were barely positive in the fourth quarter. With money growth likely to slow even more sharply in response to tapering by the FOMC, the velocity of money in a major downward trend, coupled with increased global over-indebtedness, poor demographics and other headwinds at work, the faster observed inflation of last year should unwind noticeably in 2022.

No soft landing

10-Year Treasury yields have climbed in response to the December FOMC minutes which suggest a faster taper of QE purchases and faster rate hikes. Breakout above 1.75% would offer a medium-term target of 2.3% (projecting the trough of 1.2% above resistance at 1.75%).

10-Year Treasury Yield

The Dollar Index retreated below short-term support at 96, warning of a correction despite rising LT yields.

Dollar Index

Do the latest FOMC minutes mean that the Fed is serious about fighting inflation? The short answer: NO. If they were serious, they would not taper but halt Treasury and MBS purchases. Instead of discussing rate hikes later in the year, they would hike rates now. The Fed are trying to slow the economy by talking rather than doing — and will be largely ignored until they slam on the brakes.

Average hourly earnings growth — 5.8% for the 2021 calendar year — is likely to remain high.

Hourly Wage Rate

A widening labor shortage — with job openings exceeding total unemployment by more than 4 million — is likely to drive wages even higher, eating into profit margins.

Job Openings & Unemployment

The S&P 500 continues to climb without any significant corrections over the past 18 months.

S&P 500

Rising earnings have lowered the expected December 2020 PE ratio (of highest trailing earnings) for the S&P 500 to a still-high 24.56.

S&P 500/Highest Trailing Earnings (PEmax)

But wide profit margins from supply chain shortages are unsustainable in the long-term and are likely to reverse, creating a headwind for stocks.

Warren Buffett’s long-term indicator of market value avoids fluctuating profit margins by comparing market cap to GDP as a surrogate for LT earnings. The ratio is at an extreme 2.7 (Q3 2020), having doubled since the Fed stated to expand its balance sheet (QE) after the 2008 global financial crisis.

Market Cap/GDP

Stock prices only adjust to fundamental values in the long-term. In the short-term, prices are driven by ebbs and flows of liquidity.

We are still witnessing a spectacular rise in the M2 money stock in relation to GDP, caused by Fed QE. The rise is only likely to halt when the taper ends in March 2022 — but there is no date yet set for quantitative tightening (QT) which would reverse the flow.

M2/GDP

Gold continues to range between $1725 and $1830 per ounce with no sign of a breakout.

Spot Gold

Conclusion

Expect a turbulent year ahead, driven by the pandemic, geopolitics, and Fed monetary policy. Rising inflation continues to be a major threat and we maintain our overweight positions in Gold and defensive stocks. A soft landing is unlikely — the Fed could easily lose control  — and we are underweight highly-priced growth stocks and cyclicals, while avoiding bonds completely.

Never waste a good crisis

The Russian Federation has amassed a large army on the border of Ukraine and threatens to invade unless the US and NATO make concessions including the withdrawal of forces from Eastern Europe, securing Moscow a broad sphere of influence. There has been much hand-wringing in Western media: will Putin invade or is this just a ruse designed to extract concessions?

If we look past the uncertainty, it is clear that an increasingly over-confident Putin has entered a trap of his own making.

The West is faced with an ultimatum: either concede or Russian forces will invade Ukraine.

But every problem presents an opportunity.

The more aggressive Russia becomes, the stronger NATO gets.

Russian actions have united Western alliances, with even long-term neutrals Finland and Sweden, moving closer to NATO.  Both Finnish and Swedish presidents reiterated their right to join NATO in response to the Russian ultimatum.

Germany has long obstructed a stiffening of NATO defenses, increasing its vulnerability to Russian energy blackmail by shuttering nuclear power plants and supporting the Nordstream 2 gas pipeline across the Baltic Sea. But opposition is growing. A recent poll shows that the percentage of Germans who trust Russia has fallen by 11% over the past two years:

German Poll: Which Countries Do You Trust?

Concessions are unlikely, simply because there is nothing to gain from them. Concessions by the US would weaken NATO and encourage the Kremlin to make even more outlandish demands in the future. Concessions by NATO without the US would produce a similar outcome.

Russian invasion of Ukraine would be a strategic mistake.

First, invasion would be a flagrant act of war, removing the cloak of deniability that has covered Russian operations in the Donbas region. A formal state of war would increase the flow of Western technology and weapons into Ukraine as Western leaders are required to openly acknowledge Russian aggression.

Land invasions are costly in terms of both blood and treasure. The Russian army may eventually overrun the Ukrainians through the weight of forces and technological advantages. But Ukrainian armed forces have been in a protracted war in the East and are well-trained and equipped with modern anti-tank weapons, artillery and unmanned drones. The costs would be high.

Turkey’s Bayraktar unmanned combat drone

Turkey’s Bayraktar Unmanned Armed Combat Drone – Source: Ukrinform

Where the Ukrainians are at a disadvantage is in air defenses and vulnerability to long-range missile attacks. But that window is closing.

To stiffen Ukraine’s ability to resist, the United States and NATO have dispatched teams in recent weeks to survey air defenses, logistics, communications and other essentials. The United States likely has also bolstered Ukraine’s defenses against Russian cyberattacks and electronic warfare. (David Ignatius, Washington Post)

An air campaign would also achieve little without a follow-up land invasion.

Even if the Ukrainian forces are defeated, that is where the real problem starts. Occupation is a costly and morale-sapping exercise as the Soviets discovered in Afghanistan in the 1980s and the US discovered in Vietnam, Iraq and Afghanistan (they’re slow learners). An insurgency negates the occupiers’ advantages in air power and technology, leading to a drawn-out campaign with no outcome.

“You have the watches. We have the time.” ~ Taliban fighters in Afghanistan.

A Russian occupation force would require 20 combatants for every 1,000 Ukrainians, according to a formula devised by Rand Corp. analyst James Quinlivan in 1995. That would translate into an a required Russian force of almost 900,000, illustrating the impracticality.

We could expect a Russian occupation to be exceedingly brutal, along the lines of Syria, creating a humanitarian crisis and flooding the West with refugees. But that is only likely to harden resolve, marginalizing appeasers in the West, and increase support for the insurgents.

The cost of an extended Russian campaign would deplete the Russian Treasury, even without increased sanctions. It would also escalate opposition within Russia, spurred by the high cost in lives and deteriorating living conditions. The result would threaten collapse of the Russian state in much the same way as the campaign in Afghanistan led to the eventual disintegration of the Soviet Union.

Conclusion

The threat of armed invasion of Ukraine is a mistake. It is likely to strengthen resolve in the West and, if the threat is carried out, result in a long, protracted war in Ukraine. The cost in both blood and treasure would threaten to topple the Russian state.

Russian overconfidence has led them into a trap. Thinly spread across a number of conflict zones, they are vulnerable to an escalation in insurgencies wherever they have “peace-keeping” occupation forces: Syria, Belarus, Ukraine, Moldova, Georgia, and now Kazakhstan. The cost to the West would be low but would exact a huge toll on the Kremlin, depleting their military and already-vulnerable financial resources.

“Moderation in the pursuit of liberty is no virtue.”
George Crile, Charlie Wilson’s War: The Extraordinary Story of How the Wildest Man in Congress and a Rogue CIA Agent Changed History

S&P 500: Small caps diverge

The S&P 500 ($INX) remains bullish, with Trend Index holding above zero for over a year indicating tremendous buying pressure.

S&P 500

Narrow breadth is our main concern, with the Russell 2000 small caps ETF (IWM) diverging from the S&P 500 ($INX).

S&P 500 & Russell 2000 Small Caps

Conclusion

The market is growing risk-averse as the Fed starts to taper. But financial markets are still awash with cash.

M2/GDP

Buying is likely to be concentrated in the heavyweights.

Apple (AAPL), Alphabet (GOOGL), Amazon (AMZN), Meta Platforms (FB), and Microsoft (MSFT)

Small caps could possibly accelerate into a down-trend but reversal of large cap indices is unlikely with so much liquidity.

Services inflation

A friend asked a question: “Our advanced economies are 70 – 80 % Services based these days; so will this make CPI inflation difficult to sustain if wages growth is not sustained.”

The answer is YES. Inflation is unlikely to be sustained if wages growth declines.

BUT wages growth is accelerating, not declining, both in the services sector and in the broader economy.

Average Hourly Wages Growth: Total Private & Services Sector

Wages growth is also not likely to decline while we have record job openings; 5.4 million in the services sector alone.

Job Openings: Services Sector

Employers are having to offer higher wages and sign-on bonuses to attract workers — the result of record high savings levels fueled by government stimulus.

M2/GDP

New COVID variant upsets markets

JOHANNESBURG — A new coronavirus variant has been detected in South Africa that scientists say is a concern because of its high number of mutations and rapid spread among young people, Health Minister Joe Phaahla announced Thursday.

South Africa has seen a dramatic rise in new infections, Phaahla said at an online press briefing.

“Over the last four or five days, there has been more of an exponential rise,” he said, adding that the new variant appears to be driving the spike in cases. (NBC)

Concern is focused on the rapid spread of new cases and the variant’s high number of mutations which could make the virus resistant to current vaccines.

The new COVID-19 variant, called B.1.1.529, has a very unusual constellation of mutations, which are worrying because they could help it evade the body’s immune response and make it more transmissible, scientists have said. South African scientists have detected more than 30 mutations to the spike protein, the part of the virus that helps to create an entry point for the coronavirus to infect human cells…..In comparison, the Beta and Delta variant respectively have three and two mutations. (Al Jazeera)

The UK suspended flights from 6 African countries on Thursday. (Yahoo.com)

The S&P 500 fell 2.3% on Friday, while declining peaks on the daily Trend Index warn of a correction.

S&P 500

Conclusion

There is a high level of uncertainty as scientists do not yet know how lethal — and how resistant to vaccines — the new strain is. Investors are being cautious and reducing risk. Expect a correction to test primary support but no bear market unless worst fears are realized.

Inflation is coming

Inflation tops investor concerns according to Fed report

Concerns over higher inflation and tighter monetary policy have become the top concern for market participants, pushing aside the COVID-19 pandemic, the Federal Reserve said on Monday in its latest report on financial stability. ….Roughly 70% of market participants surveyed by the Fed flagged inflation and tighter Fed policy as their top concern over the next 12 to 18 months, ahead of vaccine-resistant COVID-19 variants and a potential Chinese regulatory crackdown. (Investing.com)

The market is no longer buying the Fed’s talk of “transitory” inflation.

Fed’s Bullard expects two rate hikes in 2022

St. Louis Federal Reserve Bank President James Bullard on Monday said he expects the Fed to raise interest rates twice in 2022 after it wraps up its bond-buying taper mid-year, though he said if needed the Fed could speed up that timeline to end the taper in the first quarter. “If inflation is more persistent than we are saying right now, then I think we may have to take a little sooner action in order to keep inflation under control,” Bullard said in an interview on Fox Business Network……Bullard has been among the Fed’s biggest advocates for an earlier end to the Fed’s policy easing, given his worries that inflation may not moderate as quickly or as much as many of his colleagues think it will. (Reuters)

The Fed are reluctant to hike interest rates, to rein in inflationary pressures, as it would kill the recovery.

Producer Price Index

Producer prices (PPI) climbed more than 22% in the 12 months to October 2021, close to the high from 1974 (23.4%). Consumer prices have diverged from PPI in recent years but such a sharp rise in PPI still poses a threat to the economy.

Producer Price Index (PPI) & Consumer Price Index (CPI)

Iron and steel prices, up more than 100% year-on-year (YoY), will inevitably lead to price increases for automobiles and consumer durables. Other notable YoY increases in key inputs are construction materials (+30.6%), industrial chemicals (+47.3%), aluminium (+40.7%), and copper (+34.5%).

Producer Price Index: Commodities

Underlying many of the above price rises is a sharp increase in fuel, related products and power: up 55.7% over the past 12 months.

Producer Price Index: Fuel & Energy

Conclusion

Inflation is coming, while the Fed are reluctant to hike interest rates. Buy Gold, precious metals, commodities, real estate, and stocks with pricing power —  a strong competitive position which enables them to pass on price increases to their customers — if you can find them at reasonable prices. Avoid financial assets like bonds and bank term deposits.