Will the US be Able to Evade a Recession in 2022?
Yes, I believe so. The collapse of the Russian economy will hit Europe and Asia a lot harder than the United States. It's hard for the ECB's hawkishness to be taken seriously when Europe can't even get their hands on natural gas, oil or corn. The US is coming off the backs of very accommodative stimulus and Americans consumers are ready to spend. American commodity producers will record record profits. The US labor market is tight and salaries are still increasing. US tech stocks have been beaten down but, risk-off sentiment could stir interest in them.
Energy Prices, Inflation and Monetary Policy are all very closely linked. Easy monetary policy and cheap energy lead to inflationary forces and economic growth. When the economy grows, so does production, leading to a lower unemployment rate, further fueling demand. A tighter labor market leads to increased wages. However, GDP eventually peaks and the cycle starts reversing on itself.
Energy prices rise as the economy expands due to supply/demand dynamics. Higher demand leads to higher prices. As higher prices burden consumers, GDP slows and energy prices lower due to lower demand.
Energy Producers love higher prices. As soon as the Raw Material prices spike, Energy producer raise the price paid by consumers. Breakeven for Oil producers is around $40-$50 a barrel. Consumers pay high prices for a longer period of time because, producers act as slow as possible to lower prices and maximize profit. High amount of profits allow for energy producers to more easily obtain supply. Oil is a very supply/demand driven market. Oil prices recently spiked due to externalities from Ukraine/Russia tensions and supply chain issues (Oil transport, refinement, etc.). China is one of the biggest importers of Oil and China is headed into a recession. Additionally, North American supply will be able to tame extreme moves. It is important to note that consumers are in better position to absorb these higher prices. Worries around Covid have dropped. The world is finally returning to normal and people are willing to stomach high to spend discretionarily. Higher prices will stick around because gas, wheat, corn and fertilizer will be in low supply due to Russia/Ukraine. But the EU/Asia/Africa will be hit harder than the US. Americans aren't really concerned about not having power or food; they are concerned about paying a bit more for it. However, Europeans don't have natural gas, Africans don't have food, etc.. These issue hit a lot closer to home for EU/Asia/ Africa compared to the US. Growth is expected to also slow in these countries as high energy prices lead to weaker demand. The recession in Russia will bring down the rest of Europe. This will prevent EU/Asia/Africa banks from taking a hawkish policy. Additionally, the dollar has appreciated in the global risk-off trade. Commodities are priced in dollars so, they are more expensive for EU/Asia/Africa. The US has the tools and is in the position to evade a recession in 2022. Expect the Dollar to rise. There will be hidden gems in the US to invest in, in 2022. North American producers of fertilizer, corn, shale and Natural Gas will see increased revenue...
The difference between Core (without energy/food) and Non-Core CPI is worth noting. The fed has mainly been focusing their policy around Core CPI but, now is being forced to tackle raging Non-Core CPI. The problem is the fed only has tools to combat Core CPI. Raising the fed funds rate isn't going to solve the trucking problem, oil supply chain, trade sanctions, etc. Nevertheless, the Fed's ultimate goal to increase Economic Growth. They do not want to get in the way of that. Once, we see negative GDP growth, the fed has effectively failed and a recession ensues. Markets will predict more rate hikes than the fed actually acts upon. The fed's main goal will be to keep real interest rates as negative as possible so, they will need to raise the inflation expectation. Real Rates are very negative meaning that conditions are more or less stimulative. Banks are incentivized to loan their money out to needy consumers hedging against inflation. Yes, however these type of bank loans lead to higher default rates and increased capital prices. However, low real interest rates did not cause the price inflation we are seeing now. The price increases we are seeing now are mostly due to supply issues. The covid crash which occurred in March 2020 plunged GDP growth and a recovery was made possible by the fed. The fed is behind the curve but that is the only place they can be. They can't stifle economic growth too soon. But now the fed's hand is being forced to move. The fedfundsrate has just been increased to 0.25%-0.50%. The fed is walking a tight rope. Powell hinted, for the May meeting, it is entirely possible the fed decides to pursue a bit of balance sheet reduction instead of raising rates.
High energy prices means, goods become more expensive, electricity bills rise, etc. The consumer is forced to divert their discretionary funds to buy staples.
. Since November, Consumer Staples have vastly outperformed. If bearish conditions persist expect staples to continue to outperform. American consumers are very strong and are looking to spend coming out of the 2020 - 2021 covid spikes. Economic growth in the US expected. However, across the Pacific and Atlantic the story is falling growth and production. The Fed is in the process of accumulating ammo, in the form of rising fed fund rate and maintaining high inflation expectations, getting ready for a 2023 recession. The end of 2022 will be when the US struggles with growth.
Copper looks like it is running into overhead resistance. The Copper to Gold ratio signals potential relative strength in Gold. Copper is like a proxy of manufacturing and economic expansion.When Copper rises the economy expands.
Energy Prices, Inflation and Monetary Policy are all very closely linked. Easy monetary policy and cheap energy lead to inflationary forces and economic growth. When the economy grows, so does production, leading to a lower unemployment rate, further fueling demand. A tighter labor market leads to increased wages. However, GDP eventually peaks and the cycle starts reversing on itself.
Energy prices rise as the economy expands due to supply/demand dynamics. Higher demand leads to higher prices. As higher prices burden consumers, GDP slows and energy prices lower due to lower demand.
Energy Producers love higher prices. As soon as the Raw Material prices spike, Energy producer raise the price paid by consumers. Breakeven for Oil producers is around $40-$50 a barrel. Consumers pay high prices for a longer period of time because, producers act as slow as possible to lower prices and maximize profit. High amount of profits allow for energy producers to more easily obtain supply. Oil is a very supply/demand driven market. Oil prices recently spiked due to externalities from Ukraine/Russia tensions and supply chain issues (Oil transport, refinement, etc.). China is one of the biggest importers of Oil and China is headed into a recession. Additionally, North American supply will be able to tame extreme moves. It is important to note that consumers are in better position to absorb these higher prices. Worries around Covid have dropped. The world is finally returning to normal and people are willing to stomach high to spend discretionarily. Higher prices will stick around because gas, wheat, corn and fertilizer will be in low supply due to Russia/Ukraine. But the EU/Asia/Africa will be hit harder than the US. Americans aren't really concerned about not having power or food; they are concerned about paying a bit more for it. However, Europeans don't have natural gas, Africans don't have food, etc.. These issue hit a lot closer to home for EU/Asia/ Africa compared to the US. Growth is expected to also slow in these countries as high energy prices lead to weaker demand. The recession in Russia will bring down the rest of Europe. This will prevent EU/Asia/Africa banks from taking a hawkish policy. Additionally, the dollar has appreciated in the global risk-off trade. Commodities are priced in dollars so, they are more expensive for EU/Asia/Africa. The US has the tools and is in the position to evade a recession in 2022. Expect the Dollar to rise. There will be hidden gems in the US to invest in, in 2022. North American producers of fertilizer, corn, shale and Natural Gas will see increased revenue...
The difference between Core (without energy/food) and Non-Core CPI is worth noting. The fed has mainly been focusing their policy around Core CPI but, now is being forced to tackle raging Non-Core CPI. The problem is the fed only has tools to combat Core CPI. Raising the fed funds rate isn't going to solve the trucking problem, oil supply chain, trade sanctions, etc. Nevertheless, the Fed's ultimate goal to increase Economic Growth. They do not want to get in the way of that. Once, we see negative GDP growth, the fed has effectively failed and a recession ensues. Markets will predict more rate hikes than the fed actually acts upon. The fed's main goal will be to keep real interest rates as negative as possible so, they will need to raise the inflation expectation. Real Rates are very negative meaning that conditions are more or less stimulative. Banks are incentivized to loan their money out to needy consumers hedging against inflation. Yes, however these type of bank loans lead to higher default rates and increased capital prices. However, low real interest rates did not cause the price inflation we are seeing now. The price increases we are seeing now are mostly due to supply issues. The covid crash which occurred in March 2020 plunged GDP growth and a recovery was made possible by the fed. The fed is behind the curve but that is the only place they can be. They can't stifle economic growth too soon. But now the fed's hand is being forced to move. The fedfundsrate has just been increased to 0.25%-0.50%. The fed is walking a tight rope. Powell hinted, for the May meeting, it is entirely possible the fed decides to pursue a bit of balance sheet reduction instead of raising rates.
High energy prices means, goods become more expensive, electricity bills rise, etc. The consumer is forced to divert their discretionary funds to buy staples.
Copper looks like it is running into overhead resistance. The Copper to Gold ratio signals potential relative strength in Gold. Copper is like a proxy of manufacturing and economic expansion.When Copper rises the economy expands.
