Author: Rebekah Stovall
Asset Allocation Bi-Weekly – #71 “A Commodity Update” (Posted 3/21/22)
Bi-Weekly Geopolitical Podcast – #5 “The Ukraine War and the Path of Globalization” (Posted 3/14/22)
Bi-Weekly Geopolitical Report – The Ukraine War and the Path of Globalization (March 14, 2022)
by Bill O’Grady | PDF
There are decades where nothing happens; and there are weeks where decades happen.
̶ Vladimir Lenin
Over the coming weeks, we will be analyzing the impact of the war in Ukraine. Clearly, the situation is highly fluid[1] and projections on how the future will be affected by the war must be tempered with the fact that conditions will certainly change.
In this report, we will focus on the economic sanctions and their effects on globalization. As the conflict has evolved, Western nations have moved quickly to implement serious sanctions on Russia that will likely have far-reaching effects not just on the Russian economy but also on global trade and investment.
Our report begins with the sanctions on the Russian Central Bank and the impact on its foreign reserves; the discussion includes an analysis of Russian policies designed to accumulate reserves. From there, we project how reserve managers address the risk unveiled by the sanctions, including how nations view trade and development. Using this information, we examine how this change will affect globalization and what impact these changes will have on the economy, inflation, and markets. A look at the role of cryptocurrencies is also included. Finally, we close with potential market ramifications.
Don’t miss the accompanying Geopolitical Podcast, available on our website and most podcast platforms: Apple | Spotify | Google
[1] For comments on how the war is unfolding, we recommend monitoring our Daily Comment.
Asset Allocation Bi-Weekly – #70 “Believe It or Not, Fiscal Policy Is Tightening” (Posted 3/7/22)
Bi-Weekly Geopolitical Podcast – #4 “The Turkish Experiment” (Posted 2/28/22)
Bi-Weekly Geopolitical Report – The Turkish Experiment (February 28, 2022)
by Bill O’Grady | PDF
Don’t miss the accompanying Geopolitical Podcast, now available on our website and most podcast platforms: Apple | Spotify | Google
The Turkish economy is being roiled by spiking inflation and a sharp decline in the Turkish lira (TRY). The orthodox response to such a macroeconomic crisis is austerity. Fiscal and monetary policy become tight; taxes are raised, or spending is cut, or both occur and interest rates are increased. The goal is to depress domestic demand because the root cause of these problems is usually a persistent current account deficit. Reducing domestic demand usually leads to a reduction in the current account deficit.
Turkish President Erdogan has adopted a heterodox response to the current crisis. He has fired numerous officials of the Central Bank of the Republic of Turkey (CBRT) over the past two years who insisted on raising interest rates to address the aforementioned problems. Since July 2019, when Erdogan relieved Murat Cetinkaya of the governorship of the CBRT, he has installed three governors in less than three years. Erdogan believes that increasing interest rates leads to higher inflation on the idea that increased borrowing costs will be applied to prices. This position is at odds with the normal prescription for addressing an inflation and currency crisis.
In this report, we will begin with a review of the basic economics of savings balances and how current account deficits are created and funded. From there, we will provide an examination of Turkey’s current economic situation. The next section will deal with the government’s response. We will close with market ramifications.
Asset Allocation Bi-Weekly – #69 “The U.S. Trade Deficit and Global Prices” (Posted 2/22/22)
2022 Outlook: Update #1 (February 18, 2022)
by Mark Keller, CFA, Bill O’Grady, and Patrick Fearon-Hernandez, CFA | PDF
In our 2022 Outlook: The Year of Fat Tails, we outlined a forecast with a higher likelihood of events outside the norm. To compensate for the unusual level of uncertainty, we promised to provide frequent updates to the forecast. This report is the first of the year. One of our contentions in the forecast was that the FOMC would not raise interest rates this year. In light of developments, this position is untenable. Therefore, in this update, we will discuss four potential outcomes from the upcoming rate hike cycle and the potential effects on financial markets.
Monetary Policy
Over the past three months, we have seen a dramatic shift in expectations surrounding monetary policy. One way to observe them is by the behavior of the two-year deferred three-month Eurodollar futures implied yields.
In early November, the deferred Eurodollar futures were projecting steady policy for the next two years. In a mere three months, we have seen a rapid shift to nearly four rate hikes of 25 bps each. Although similar shifts have occurred in the past, we note that when such shifts occur, the likelihood of recession does increase.
With tighter monetary policy looming, we would argue there are four likely terminal paths. They are as follows:
- Path #1: Policy is rapidly tightened, leading to a recession.
- Path #2: Policy is tightened too slowly, causing a debasement crisis.
- Path #3: Policy tightening triggers a financial crisis, leading to a rapid easing of policy.
- Path #4: A soft landing occurs.