So it appears that, economically, the only question at this point is “what will break first?”
Here’s 10 looming issues to watch:
One: The European Energy Crisis
This is obviously the 600 lb gorilla in the room. Europe was seeing energy prices go up dramatically even before Putin invaded Ukraine, and now with Nordstream shut down the situation is even more dire…
The issue isn’t necessarily “freezing in the cold” this winter but rather the 2nd order effects in terms of a) destruction of business sector (very relatable example of British pubs below, but extrapolate that to industrial sector in Germany/etc)..
…and/or b) massive money printing “energy bailouts”. Possible results? -Massive debasement of $EUR -Political pressure on US/Fed -Détente w/ Putin in order to get gas turned back on -Short term use of more oil and long term pivot to nuclear.
Two: Japanese Currency Crisis
This appears to be coming to a head already… Japan has one of the highest debt:gdp ratios in history, and therefore cannot raise rates substantially, is a net importer of energy, and has a declining population…
- -$JPY debasement/total debt monetization
- -Global economic contagion
- -Pressure on US/Powell
Three: Severe Chinese Economic Crisis
This is another issue that seems to have been worsening for months with no real resolution, and is particularly tricky because data/information out of China is so opaque…
The main crux of the issue seems to be a massively overbuilt/overlevered property sector, + demographic collapse, + political instability.
- -Severe economic contagion
- -Supply chain issues
- -Political black swans re: internal Chinese politics/Taiwan/etc
Four: Eurozone Debt Crisis
This is another one already coming to a head… but essentially Europe is again confronting the same problems they did ten years ago, in terms of nobody wanting to buy the government bonds of Italy and similar countries.
Italy is the poster-child for this because a) they have a very messy political system and lots of structural economic problems, and b) they have arguably the worst demographics of any country on earth.
Many would argue that this was always going to be a problem with the Eurozone given it has one currency but separate bond markets.
- -Massive $EUR debasement
- -Eurozone fragmentation
- -Global economic contagion
Five: Russia/Ukraine Conflict Escalating
The Russia/Ukraine situation continues to be of massive geopolitical and economic importance, and Putin’s recent speech on “mobilization” and “referendums” definitely doesn’t seem to suggest de-escalation.
Six: Oil Prices Spiking
The US gov (via SPR releases + rate hikes) have been doing everything they possibly can to lower oil prices. While some think this will indeed lower prices via demand destruction, others think prices may surge higher.
Indeed oil seems a lot like a beach ball being held underwater (h/t) via the aggresive rate hikes + SPR releasees, and could shoot much higher once it pops, due to the (cont)…..overwhelming underinvestment the last 5-7 years as a result of ESG/etc, + Europe potentially utilizing way more oil this winter as alternative to LNG (which is way pricier in Europe right now bc its way more difficult to move around the globe).
Seven: Emerging Market Contagion
Emerging markets are in an awful position right now, as they are suffering the downstream effects of Powell’s aggressive rate hikes and Europe’s disastrous energy situation, as well as high oil prices.
Furthermore, they can’t just “print money” to pay for things the way the US can. Otherwise they quickly end up like Argentina (see below) As a result we may see particulary tragic results in EM nations + subsequent economic contagion.
Whatever one’s thoughts on the last 2.5 years, it is clear that many governments worldwide have grown to, ahem, see the “silver lining” in pandemics, in that they offer a very convenient excuse for increased government power.
While its definitely not my base case, it certainly seems possible that some governments will suddenly grow super concerned about xyz existing or new disease, and we’ll start seeing all the same stuff we’ve grown accustomed to in such circumstances.
Nine: US Politics
The US mid-term elections are coming up in early November, and while these aren’t really an ‘explosive’ variable, their outcome could certainly have market implications.
There is actually some massive correlation between US government type (part of presidential term, split vs single party rule, etc) and stock market performance.
Other variables could be Biden’s health, Biden declaring he won’t run for re-election, Trump being indicted/arrested, any big acts of political violence, etc. Not to mention all the normal government shenanigans that affect markets…
Ten: Real Estate Collapse In AU/CA/Etc There is a lot of attention on US real estate right now, but it seems to me that before US real estate “breaks” we would see a collapse in Australia and Canada first .
The AU/CA RE markets are already insanely expensive relative to median wages, gdp, and basically any other variable you can think of. They also don’t have the 30 year fixed rate debt that has become prevalent in the US….