Eleven Issues for the New World Economy, Part 1

The Covid-19, the global supply chain breaks, the frictions in the opening of economies around the world and now the Russian invasion of Ukraine give birth to many winners and losers in economies, financial markets and political structures. Six of them are driven by transfers of income and assets. Five more are essentially the result of the revaluation of goods and assets that I will cover in a separate column. The changes made by any of these forces have further significant consequences.

I define globalization as the use of Western technology to produce goods in cheaper production facilities that are then exported to rich countries in North America and Europe. In modern times, production using low-cost but disciplined labor began in China in the late 1970s and then spread to other Asian countries such as Vietnam. Globalization decimated high-paying manufacturing jobs, which fell from 19.6 million in the US in 1979 to 12.6 million last month. This spawned far-right and far-left political movements with significant results, including Donald Trump’s 2016 election victory. at 6.1% more recently.

1. Globalization has encouraged extensive but complex international supply chains designed to minimize costs. The semiconductors can be produced in Taiwan, then shipped to Malaysia for further assembly and to China for final production of consumer goods exported to the West. The pandemic and the Russian invasion of Ukraine have disrupted these supply chains. They will not disappear as long as there are significant differences in production costs in different countries, but they are shortened and shifted to closer countries such as Mexico. The home answer is automation that saves more manpower.

The winners are Mexico, the automation and employment of hardware and software, while the losers are the job industries and the trade unions in the West.

2. The war in Ukraine intensified the jump in fossil fuel prices that was already under way as a result of the pandemic and the reluctance of OPEC + to significantly increase crude oil production. President Joe Biden has also pledged to eliminate fossil fuels before they can be replaced by alternative renewable energy sources. The United States is a net exporter of clean energy other than safe sources from Canada and Mexico, but with Russia supplying 40% of Europe’s gas and war-related sanctions, demand for replacement from the US and other sources such as Qatar has been launched.

The jump in gasoline prices is so perceptible to consumers that Biden was forced to release oil from the Strategic Oil Reserve. It will probably also need to help US oil companies, and while large oil companies are emphasizing their green credentials, smaller producers are stepping in. Oil refineries may also do well as their margins — the difference between the cost of crude and the selling prices of refined products — increase. In addition, they may receive some of the state cuts in gasoline taxes.

The jump in fossil fuel prices has renewed interest in uranium production and nuclear reactors. Prices for uranium oxide and uranium miners’ stocks have soared as Washington considers restricting uranium imports from Russia. Belgium recently postponed the phasing out of nuclear energy by 10 years. France announced plans in February to build six new reactors, and British Prime Minister Boris Johnson is promoting his country’s nuclear plans.

Other winners are OPEC and producers and carriers of liquefied natural gas, but Asian consumers are losing out as LNG is diverted to Europe. High energy prices rob consumers of their purchasing power. Manufacturers and producers of wind, solar and other renewable energy equipment may at least temporarily overshadow the benefits of faster availability of fossil fuels, including coal.

3. Inflation is a timeless method of transferring purchasing power and assets. The recent widespread price spike due to the pandemic, the supply chain disruption, the friction at the opening of the economy and the war in Ukraine are without a doubt temporary. Asian economies are large producers but small consumers, with consumer spending in China accounting for 38% of GDP, compared with 68% in the US. Therefore, over-saving and global supply-to-demand surplus are extremely deflationary.

U.S. consumers are also expecting a manageable annual inflation rate of 3.7% over the next three years, according to a Federal Reserve survey in New York, so there is no evidence of a pre-need market, such as in the late 1960s and 1980s. 1970. This episode pushed stocks and capacity, triggering faster inflation and reaffirming expectations, leading to more anticipated purchases in a self-sufficiency cycle. Also, the recession that I think the US economy is entering now will lower prices.

Wages, meanwhile, are not keeping pace with inflation. Hourly earnings in the US rose 5.6% in March from a year earlier, but the CPI rose 2.3 percentage points higher in February. Those with a steady income without escalators at a cost of living also lose. With declining purchasing power and consumer confidence, retail sales last year were stable and declining in real terms. Savers who pay fixed interest rates on deposits are lost, as are those who hold assets with negative real returns.

Winners include borrowers who pay negative real interest rates on fixed interest rate lending. Homeowners with fixed rate mortgages are making a profit as house prices rise, but I believe this bubble is about to burst. Governments benefit as inflation pushes taxpayers to higher income levels.

4. The Fed has launched a credit crunch campaign that is likely to accelerate a recession. The inverted Treasury yield curve also strongly indicates the direction of a business downturn. A recession is highly likely given the simultaneous transition from quantitative easing to quantitative easing and the vulnerability of many highly speculative financial markets.

Rising interest rates hit borrowers, especially those with floating rate loans. Emerging markets are suffering as borrowing costs rise and currencies fall as slower US growth reduces demand for their exports. Floating-rate US bank lending funds are protected from rising interest rates, but not from default on many of their low-quality loans during a recession. Banks and other so-called spread lenders are more profitable as interest rates rise, as their lending rates tend to rise faster than the interest rates they pay depositors.

Car loan rates are often linked to government yields, but are fixed for several years, sometimes exceeding the life of the vehicle. The interest rate on credit card loans for those with good credit often rises with market rates. In contrast, federal student loan interest rates for the 2021-2022 school year were set last May in relation to the 10-year government bond auction and are fixed for the duration of the loan.

5. The US dollar has strengthened as it usually does as a refuge in a sea of ​​global problems. This benefits US foreign investors as their values ​​increase relative to their devalued currencies. It has the opposite effect on US investment abroad. A strong dollar also helps importers of U.S. goods and services as their dollar-denominated revenues are converted into their own currencies, but it forces U.S. exporters to cut costs or reduce their profit margins to compete overseas.

This year, the dollar is up against 31 of the 41 major currencies, with the exception of some Latin American currencies. The Brazilian real is up 16% against the dollar, the Chilean and Uruguayan pesos are up 9.4% and 7.4%, and the Mexican peso is up 2%. Rising commodity prices are benefiting those exporters of raw materials who have also raised interest rates to protect their currencies. And their stock markets are some of the best in the world.

6. The political winds may change quickly, but for now the Republicans seem to be the winners and the Democrats the losers in the upcoming midterm elections in November. And it will not take many changes to overturn control of Congress with the Senate split 50-50 and the Democrats holding a small 222-212 majority in the House, where 218 seats means control. Biden’s low turnout does not help Democrats.

If the Republicans regain control of Parliament – if not the Senate – Washington will find itself in a real impasse. Interest in social programs and income redistribution will undoubtedly wane as both parties take their place in the run-up to the 2024 general election. However, even if Biden can get some cooperation from Congress, he remains to control the huge executive department and its many services. As we have seen in the past, Presidential Executive Decrees can be powerful tools to bypass Congress. More from authors in the Bloomberg Opinion:

• The West must save globalization: Micklethwait & Wooldridge

• How to Be a Winner From De-Globalization: John Authers

• There is a Bull Market in Forecasting Macro Doom: Jared Dillian

This column does not necessarily reflect the views of the editorial board or Bloomberg LP and its owners.

Gary Shilling is president of A. Gary Shilling & Co., a New Jersey consulting firm, registered investment consultant and author of “The Age of Deveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” Some of the portfolios he manages invest in currencies and commodities.

More stories like this are available at bloomberg.com/opinion

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