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What Has Happened This Year????
The Federal Reserve has taken a very hawkish stance on the position of interest rates in it’s fight to stem persistent inflation. The September Consumer Price Index came in at 8.3%, an increase which was much higher than expected. Jerome Powell, the head of the Federal Reserve stated that they have a dual mandate to control inflation at 2% a year, and full employment at or near a 4% unemployment rate. They realize that increasing interest rates will cause some increase in the amount of unemployment. They have now raised the Federal Funds Rate to 3 ¼% and announced that they expect to raise interest rates again in November by ¾% and December by ½% with a peak interest rate or terminal rate of approx. 4 ½%. This would be the highest interest rates we have seen in almost 20 years.
Where do they go from here?
The Fed will have to pivot to a change in interest rate policy sooner than later, and probably much sooner than they would like. As of last Friday, the Bank of England had to step in and stem the collapse of the bond market in London. This was due to terrible inflation and interest rate policy by the new Prime Minister to help their citizens deal with a 80% increase in fuel costs for the winter. We are going to see disruptions in the credit markets as the Fed continues to raise interest rates causing our dollar to become very expensive around the world and many other currencies to lose value quickly, destabilizing their countries. The Fed pivot will put a floor under this uncertainty. There are two main factors that will drive their decision that they will not want to do. First, the interest on the debt of the United States is in excess of 30 trillion dollars, and frankly we just can’t afford 4% interest on all of that debt, which is almost 25% of the entire budget of the federal government. Second, food costs around the world. As our dollar has appreciated it has made food that we export so much more expensive around the world leading to the World Food Bank, the United Nations, and various other organizations to ask the Central Banks of the World to rethink their rising interest rate intentions and projections. The Federal Reserve has 400 of the world’s economists on staff to help with their policymaking projections. Based on this year’s results, I think they need 401 as somebody is missing that actually knows what is going on out here in the real economy!
Geopolitical
Wow, what a year…again! For the past 30 years we have had a very stable balance of trading in the world markets. There have been a few hiccups in 1998, 2008, and 2018, but for the most part a stable trading environment until now. Now the Chinese and the Russian Federation are attempting to create their own currency to replace the American dollar on the world stage. Why is this happening? As we continue to increase interest rates, which increases our value of the dollar, other currencies feel “left out” as they are now worth so much less. Now CEO’s all over America are telling their logistics departments to get out of China as soon as feasibly possible. They have shown they are an unfair trading partner cannibalizing our technology. They require companies to turn over intellectual property rights in order to operate in their country. This has also caused huge supply chain issues as they will not use American vaccines for the covid virus, and they have shut down many cities larger than the size of New York this year with a complete lockdown. China would have been thought to have a rational policy on commerce and keeping themselves at the forefront of growth as a world economy, nothing could be further from the truth. They continue to try and use vaccines that are only 44% effective and shut down cities as a result. VERY problematic. The Ukraine War has led to 13% of the World’s food supply being taken out of production. This is only half the story, almost 60% of the world’s fertilizers come from this area of the globe, putting immense pressure on the food supply for everyone, but most importantly for poor and barren countries which must purchase most of their food from this region. Look for the US to increase purchases of Canadian fertilizer and produce more from our own natural gas production.
Energy
One of the biggest factors of disruption this year has come from the war in the Ukraine causing significant issues with supplies of natural gas for Europe. The price of natural gas in the United States today is about $6.35 and in Germany is nearly $77. Yes, you did read that correctly, more than 10 times as much. How did they get themselves so dependent on Russian oil and natural gas especially after being a cold war adversary for the last 70 years? Greed and conversion to the lower cost alternative energy sources which could not provide enough energy. The North Sea has a vast amount of wind turbines for energy production, the problem this year is that the wind almost didn’t blow, so no electric was produced. Russia stepped up and provided a very reliable huge quantity of gas at a very low, predictable cost. At the same time Europe, specifically Germany, were closing their coal, nuclear, and oil producing electrical power plants. They were becoming ever more dependent on potentially unreliable sources. Cheniere Energy is working diligently to meet the demand in Europe with ocean going super tankers from our ports here in New Jersey. So, we are selling the Marcellus Shale gas from western Pennsylvania and eastern Ohio to our friends in Germany and other European countries. On October 5th, OPEC meets in Vienna to discuss production cuts of up to a million barrels a day of oil. This has come from the decline in oil from almost $122 a barrel to near $80.
Transportation
Cargo rates have plummeted 75% from last year and there are only 6 ships waiting to unload off the coast of California compared to over 100 last year. Freight rates on trucking and railroads continue to decline with FedEx stating they will be seeing reduced freight shipments for the coming holiday season. Cargo shipowners are cancelling sailings as global trade flips from backlogs to empty containers.
Where do we go from here?
The Federal Reserve will pivot, even if it’s to say they don’t feel they will need to raise interest rates as much as expected. Asset prices in stocks and bonds will improve with a better outlook on interest rates, inflation, and the war in the Ukraine. The outcome of the mid-term election has resulted in a higher market six months later in every election except for one back 40 years ago. The darkest month of the market on an annualized basis is September, and we thankfully are through that. Corporate earnings will not be as bad as feared as supply chain issues will have worked themselves out on many fronts through the remainder of the year.
Where do we see the future?
Cloud computing – This area will continue to drive productivity gains throughout the manufacturing and services sectors. At this moment in time, we are seeing a lull in this trend, but this is only temporary and will resume in 2023. Cybersecurity is an ongoing concern for many companies especially as they have more employees and clients who are working remotely and potentially not covered by their company’s threat protection environment. The US is the leader in cybersecurity, and with millions of threats being created on a daily basis, this is very good news for our country’s future.
Innovation – many companies are taking this time to look at what they are working on, profitable at, and deciding if they are still on the correct path. Look for massive amounts of mergers and acquisitions as companies try and capitalize on much lower values of potential targets.
Agriculture – a true bright spot in the economy continues to be our ability to produce much of the world’s food supply. The President last week asked American farmers to look at double crop production for next year to increase our carryover of stocks as they have become perilously low around the world. Droughts in much of the food producing areas of the world contributed to this along with the war in the Ukraine. Artificial intelligence, genetics, and alternative labor sources will play a big part in this drastic productivity gains we should see this decade.
Space - The ultimate innovation. Look for us to have manned moon missions within five years, and a moon base by the end of the decade. The target for landing on Mars is still 2033, but Elon Musk states he will be able to do it much sooner. This will spur significant technology gains as the Apollo program did in the 1960’s.
I hope you were able to find some helpful information included in this newsletter, please let us know if you would like to have information on any specific subject. $ Money Matters $
Chris
Chris Schiefer is a Registered Representative with Securities offered through Cambridge Investment Research, Inc., a Broker/ Dealer, Member FINRA/SIPC. Investment Advisor Representative Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Legacy Capital Advisors, LLC are not affiliated.