The slowdown in the key economies of the US and China have significant tailwinds for countries dealing with them. If the US heads into recession in 2022 at the same time as the Federal Reserve lowers its bond purchases and starts raising its Federal Funds rate (likely starting in March), then we may see a very difficult and declining stock market. This has been a lengthy bull market financed by a record increase in debt (monetary heroin) that is now being withdrawn. One surprise in the Fed minutes released last week is that the Fed is not just thinking of ending injecting the US$120B/month (US$1.4T annually or 6% of GDP) but also taking liquidity out as they don’t re-invest maturing investments from its US$8.78T treasury and mortgage portfolio. This could remove over US$100B per month or US$1.2T annually starting in Q2/22 and remove an additional 5% of monetary heroin. Overall they could be removing over 11% of liquidity starting in Q2/22 which would clearly have a negative impact on the bubble assets that ran up sharply on the liquidity injections. Liquidity withdrawals are likely to knock the stuffing out of bloated valuations in FAANGM – tech stocks, cryptocurrencies, commodities, art, NFT’s and real estate etc. We are seeing the early signs of this already – take a look at the price declines in the crypto world. Adding to this challenge the Fed signaled that they could get more aggressive in raising interest rates.
China is seeing slower growth as it cleans the air in the heavily populated and industrial heart of China, for the February 2022 Winter Olympics. One indicator of this is that the consumption of cement has plunged over the last six months (Chart #3). It is at the lowest level seen this century. The financial problems of housing developer, Evergrande and others, is part of this decline in consumption.
We have discussed the five reasons for 2022 difficulties before and will go over them in upcoming issues as new details come out showing their negative market impact. In this issue we spend time on the War Drums possibility of Russia invading/annexing eastern Ukraine in the near-term.
We sure hope it does not happen but with President Putin surrounding the area with nearly 175,000 military personnel, over 1,200 tanks (Ukraine has only 900 tanks in the whole country), air assets (Russia has a much larger air force), medical hospitals and supplies; this does not appear to be a normal military exercise. Usually hospitals are not set up near the front lines during training exercises. President Putin is not adverse to using military force. The recent unrest in Kazakhstan as LPG (Liquified Petroleum Gas) prices were raised, necessitated Russia leading a six-nation alliance of ‘peacekeeping troops’ to assist the embattled autocratic President Kassym-Jomart Tokayev. This Russian orbit country is a mess with poor living conditions, joblessness and of course massive corruption.