Stairway to Hell
Weaponized money, canceled currency reserves and looming recession...
Joel Bowman, reckoning today from Buenos Aires, Argentina...
When goods do not cross borders, soldiers will.
~ (Attributed to) Frédéric Bastiat
Ugh, here’s an ugly image...
As the author, Luca Paolini at Pictet Asset Management, notices, every 50% rally in the price of oil going back to (at least) 1970 has coincided with the beginning of a recession. Uh, oh...
(Source: Refinitiv Datastream; Pictet Asset Management)
Of course, correlation does not necessarily equal causation. Post hoc ergo propter hoc, goes the popular logical fallacy. (Since Y followed X, then X must have caused Y.) Even so...
In any complex economy, there are countless inputs that can send the system haywire. It’s all part of the beauty, the allure, the mystique of what F.A. Hayek called “spontaneous order.” It’s also part of what makes studying the whole passing parade so interesting. But all too often, signals get crossed and information becomes corrupted. Rarely is it as simple as “this follows that.” (Indeed, Mr. Paolini noted as much himself, when he wrote, “I hope this time is different.” One suspects he is not alone in that sentiment.)
Many and varied are the reasons for recessions. (Although, we’re guessing war doesn’t help.) So too is the price of any one commodity - including oil - dependent on multiple factors. Here’s one:
(Source: FederalReserve.gov)
No, that’s not GameStop or AMC or the latest crypto flier... rather, it’s the balance sheet of the world’s largest central bank, the US Federal Reserve.
And that stairway to heaven (or hell?) in the upper righthand corner, the one that’s about to hit nine million million dollars, represents the total assets on that bulging out-of-balance sheet. Billions and billions of freshly inked dollars... chasing an increasingly strained supply of goods...
Call it another “uh-oh” data point.
Of course, the geopolitical backdrop is not helping matters, either...
BPR Investment Director, Tom Dyson, explained as much in his regular Wednesday update for paid readers. Here, a key snippet...
The war between Ukraine and Russia is a big factor here, obviously. Energy (oil, coal and gas), food (wheat, corn), and metals (palladium, copper, aluminum and titanium) are all affected by the course and the outcome of the conflict… and they’re all soaring higher. Wheat finished up 75 cents higher Monday on the Chicago Mercantile Exchange (CME). Corn was ‘limit up’ by 35 cents.
Russia exports fertilizer to the rest of the world. Ukraine exports grains. It also exported 8.2 million tons of corn to China in 2021, according to the Wall Street Journal. That’s 30% of China’s total corn imports. Combined, Russia and Ukraine account for more than 25% of world wheat exports. And energy?
Europe gets over 33% of its natural gas from Russia and over 25% of its oil. According to most reports, the gas is still moving through pipelines. Global refiners aren’t buying Russian crude oil at the moment, according to industry reports. The continuous contract for Brent Crude Oil jumped 8% in early trading on Wednesday morning to over $113–the highest price since 2014.
These are huge moves. They won’t all last. But it’s part of what I’ve called ‘inflation volatility.’ It started with stock prices. It moved into consumer prices. Now the war has moved it into commodity prices. It will be here for a while. Unless you’re a trader (or just a gambler) stay in Maximum Safety Mode.
As we type these words, news is hitting the wires that a cargo vessel was just sunk off the port of Odessa, in the Black Sea. Another report, yet to be verified, claims that “more than 40% of the territory of Ukraine is occupied and controlled by divisions of the Armed Forces of Russia.”
And now we learn that state money, too, can be “weaponized.” That is, under sanctions from foreign nations (like those the west has imposed on Russia), deposits in one sovereign country’s central bank can be frozen, seized... “canceled.”
What does this say about the safety and security of those trillions of dollars on central bank balance sheets the world over? Will banks have to choose between having their assets frozen by Beijing or DC? We’ve seen Canadian and Russian citizens lining up to extract their fiat units from ATMs... could there be a run on central banks, too? What then?
More to come…
For now, it’s Maximum Safety Mode, indeed.
Ed. Note: Dear readers who wish to join our subscriber only list - which includes monthly, in depth research reports and twice-weekly investment updates from Tom and Dan, as well as private Zoom calls with Bill and his team focused on how to navigate these turbulent markets - can do so right here...
And now for Bill Bonner’s missives from the past week...
That’s all from us for today. Tune in tomorrow for your regular Sunday Sesh, where we take a look at one nation that imposed a half a century of economic sanctions... on itself!
Cheers,
Joel Bowman
(Since Y followed X, then Y must have caused X.)
Correction needed (Since Y followed X, then X must have caused Y)