27 Dec 2022: New Year, Same Challenges
By Osama Rizvi – Energy and Economic Analyst
It has been yet another unprecedented year for not only global commodity and financial markets, geopolitics, international relations but also for us as individuals, family members and friends. Uncertainty, I believe, should be word of the year! In this blog, I just want to reflect on the bigger picture – sans any (or very less) facts, figures and data – on where the world might be headed.
As soon as normalcy returned and the idea of life, as we knew it, started to sound possible, the world was introduced to a new variant, Omicron. This variant initially made no significant impact: stock markets blipped a bit, crude responded strongly but recovered later on, governments adopted wait-and-see approach and honestly, I, including many others thought (or wished) that it wouldn’t be as bad as the Delta variant. However, befitting of the times that we are living in, it turned out to be worse especially in terms of its aggressive transmissability if not lethality. The fears have turned into reality and the sound of shutters going down increase as governments are re-imposing restrictions and lockdowns. Cases are rising steeply across Europe whereas in the UK the number of daily cases recorded hit a record high ever since the start of the pandemic. Condition in the U.S. is not very promising as well. It is almost as if we are witnessing a redux of the year 2020 when everything got bad to apocalyptic levels.
However, global economy took a breather during the last few months as economic activity recovered, resumed during the lull between Delta and Omicron. Albeit, the spectre of inflation haunts the world and (should) keep policy makers at central banks awake at night, consumer demand has recovered (resulting into another issue of clogged ports and sky rocketing shipping containers but that is for another article), mobility has increased, travelling began to normalize (a bit) and restaurants, shops were seen to be thronged with people as was the way pre-pandemic. But Omicron now presents new challenges not only in terms of individual mobility but also and especially for the policy makers.
According to a recent Bloomberg survey, participants termed Inflation as the biggest “tailrisk”. Tailrisk is an event/outcome that has an extremely low possibility of eventuating but if and when it happens, has a huge impact. If anyone has been listening to our shows, Mark Rossano has highlighted inflation ad nauseam. It was a constant theme in our ECON show and we at Primary Vision have called it well before the mainstream media outlets even started mentioning the word ‘inflation’ in their news as a threat. Many would agree that at this point the risk of inflation is so evident that it will be unrealistic to term it as a tailrisk. We have even been talking about stagflation which seems the next biggest challenge as we enter 2022.
Given the interest rate hikes by various central banks across the world – with the UK being the latest and Fed set to do multiple times in the coming years – the global economy is already positioned for a rough patch. It is important to note here that global debt has reached $226 trillion and the supply of money has been unprecedented especially as a result of Pandemic relief packages and low interest rates. Mortgage debt is also at its highest so is the margin debt (it stood at a two year high, $722 billion). With all this borrowing in place, there can only be one reaction to a rising interest rate cycle (that has already started): panic. This panic will be exacerbated with a strong dollar which will put extra pressure on emerging markets that are under immense monetary burden. We have also talked much about soaring food price inflation across the world and various researches have established a direct link between social unrests and political instability as a result of this. Interestingly, supply of dollars, which means Fed’s policy, also has a pronounced impact on food prices globally. (Read my Substack post to find out how). Such developments should ring some bells amongst the policy makers in emerging markets and developing economies as these issues need long term planning and proactive attention.
This is a good segue to mention geopolitical flashpoints. Russia and Ukarine is a recent one and albeit there has been some relief on this end, the demands by Russia are too unrealistic to be met by the U.S. and Nato. (Mark explains the whole historical context of the ongoing conflict in this video here). This can turn ugly as no one is expecting U.S. to sign a document drafted by Russia and the demands therein can be viewed as a threat to the international peace and stability by Nato and its allies as Russia has asked them to stop their “eastward expansion”. Time will tell, but there certainly will be more rounds of negotiations – and hopefully no rounds of skirmishes. Furthermore, as winters set in, Russia can chose to chastise the European nations that gets 40 percent of its gas supply from them.
Furthermore, the recent events in Turkey, where Erdogan has challenged the conventional, common economic thought and theory, slashing interest rates as inflation spiked to 20 percent. This caused Lira to plunge to its new record lows against dollar and despite the new announcements by the government to intervene the confidence hasn’t returned. This economic mismanagement can (and will) easily spill over to the domain of unrests and political instability and the country may revert to Nationalism to divert the attention of the masses. Therefore, although no one is talking about it yet, this remains a true tail risk for 2022 – a geopolitical conflict in the Mediterrenean.
The new variant has indeed thwarted any hopes regarding to easing of global supply chains, an issue that will certainly be making headlines throughout next year. Many thought that it would dissipate however, there isn’t a single issue at hand – the nature of the problem is complex. From the inefficient inventory systems that didn’t account for tail risks such as COVID-19 to the lack of workers who process the paperwork and from delays in frieght to concentration in the vendor industry – we can talk about them all day long. This ties back to our starting discussion of inflation.
As we enter 2022, it seems that the problems that we faced last year will also step in with us. The intensity of these issues might be different at some points but the nature remains the same. Omicron has given us a wake up call, and the issue of vaccine inequity has been rightly emphasized. Flights are being cancelled, number of cases continue to rise. I hope all of this just stops here and we don’t have to encounter another variant. If the world is a complex system (and it is) COVID19 was too complex of a variable that was introduced into it, producing unfathomable and unpredictable outcomes that would definitely reverberate for decades to come. The point is to realize and act on time, better if we do it before time. The global inequality has worsened as a result of COVID19, so has the total number of poor. Access to food has gone worse as millions have been added to the list of people deprived of basic amount of nutrients. Losses to businesses are one thing, but this is a matter of life itself.
A reality check is important however, my hopes for the New Year are high. With this Cautious Optimism, I wish everyone a Happy New Year on behalf of the PVN team! May it truly be a Happy one!