Originally Posted by
slats11
A perfect storm of
1. CPI inflation - food, energy, certain commodities (which will push correlated stocks up).
2. Rising rates to try and get CPI inflation under control. This (and quantitative tightening) are the only tools that central banks have, and so they are deploying them. They won't be highly effective however. Previous waves of CPI inflation were often due to increased demand - so jacking rates helped by curbing demand of discretionary items. This time, CPI inflation is due to reduced supply (China shutting down, end of globalisation, Ukraine). Putting up interest rates isn't going to reduce your need for food or petrol - it will just take it harder to meet these expenses.
3. Asset deflation due to increased interest rates - housing, certain stocks
4. "Poor effect." People spend when their house increases - they feel wealthy and can pull equity from their home. This is the wealth effect. The opposite is the poor effect - as interest rates increase and the value of housing falls. people aren't going to be buying cars, or planning expensive holidays etc. They will hunker down.
This is happening around the world
However Australia is especially poorly placed to weather this storm due to
1. Extraordinary high levels of household debt - due to all the cheap credit the past 15 years,. Interest rates have been at 5,000 (yes, 5,000) year lows according to Ban of England research (interest existed back then)
2. Some of the most expensive housing in the world
3. Many Australians are on variable rates, or short term (2-3 yr) fixed rates. In many places, interest rates are fixed for 10 years - or even the life of the loan.
4. A need to seriously think about defence for the first time in decades - defence spending will have to rise significantly as we contemplate living in a less certain world.
At the same time, the "Chinese miracle" is coming to the end. There has been an unprecedented demand for iron ore and coking coal as China transforms from a rural society to an urbanised society. The largest demographic shift the world has ever seen. However its over - China is now reaching the 70-75% plateau at which societies cease this urbanising (some people always stay in the rural areas). China is also moving to steel recycling rather than making new steel. Sp iron and coking coal exports are going to fall. Hard.
We also look destined to experience global famine on a scale not seen for a long time. China now holds 50-60% of the world wheat stocks - China can see what's coming down the pike. China and Russia (by far the 2 largest exporters of fertilisers) are both restricting exports = less grains and other plants = less feed for humans and animals. There are also huge energy inputs into food - transport obviously, but also production (greenhouses) and processing food - these energy costs will reduce production and increase costs. So we are going to have less food, and its going to cost a lot more. This will cause civil unrest within countries, but also at a global level - think of Europe with a billion hungry Africans seeking food.
My strong suspicion is that Covid is not done with us either. A very strange virus that emerged at a very interesting time. Although not insignificant, we have way overestimated the risks. Our counter-measures (which were disproportionate due to a flawed risk assessment) have caused supply chain disruptions, reckless momentary policy (modern monetary theory) and inflation (whocouldaknown).
Chickens are coming home to roost. Covid? - you ain't seen nothing yet. Get ready.
now pass me that funny tasting cordial!