Economies and markets today – 22nd May 2022

It’s been over a month since I first and last wrote about the economies and markets everywhere. For close to a month not much changed globally and then suddenly few things changed in next few days. Some of them might sound shocking but are perfectly rational.

Inflation hasn’t come down anywhere yet even with interest rate hike.

What is happening?

Catastrophic Russia-Ukraine war is still going on and with that now global food shortage is deepening. Banks everywhere have increased rates. Energy prices are soaring high as well as all kind of raw materials. Adding to that, China has not yet opened its ports, which is adding to the inflation and delays in supply chain.

Affected with energy crises and inflation and on top of that, increased interest rates has pushed EU on the verge of recession.

US is also not faring well, fed will increase rates again. Unemployment has started to increase and inventories are still piling up which is weird because China is closed. Have they moved sourcing to SEA countries? May be.

RBI in India suddenly increased interest rate, acknowledging that inflation is getting out of control. Oil prices has been reduced by approximately 6-6.5% yesterday by the government because the demand has started to suffer everywhere. India is in a very difficult position, the export-import deficit is all time high as Rupee is losing value against USD(other currencies as well).

In the midst of all of this, China decreased interest rate on short term loans. Yes, you are reading it right? Why? Because state of Chinese economy is different. Being exporter and factory of the world, China gets the raw material which also is not much, manufacture the product and also ship it. Under lockdown for about 8 weeks, inflation in China is reportedly only 2%. What!!! I know, right!

What is coming next?

China will open up and that should change a few things. The supply of raw materials and products should improve by the end of this quarter to every part of the world. This should help in reducing some of the inflation but not oil and coal.

Companies everywhere else will see decline in revenues this quarter as well. People are into saving mode and though salaries are not correcting yet, layoff from startups have started because of cash crunch. Now, this seems from the old playbook, things go bad and demand slowly rises after couple of more quarters. But only if that happens.

I believe governments would like to improve the conditions much before this year ends. The longer this goes, more problem for people and government. I think the US Fed will not hike the rates the number of times(7) people are estimating. 2-3 times more should bring the inflation around halfway down. Uncomfortable but much better. Keeping the rates there will be much better than increasing more and risking recession. Why? Because US works on credit.

India will continue to focus on inflation over growth. High oil and electricity prices will make any growth negligible otherwise.

Overall, I still think that there could still be more destruction of wealth in next quarter as companies will show results poorer than anticipation. People are starting to have less cash on hand, but more to come. And, real estate will not start to grow. Could rather go into worse situation.

In long term, the energy is going to get democratised which is also for good. Hopefully, green though. This will save lot of costs for countries and better control over energy prices. This not only constitutes energy production but also storage. Solar, wind and even hydrogen will be a part of it.

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