Author: Rebekah Stovall
Bi-Weekly Geopolitical Report – What Would a U.S.-China War Look Like? (January 18, 2022)
by Patrick Fearon-Hernandez, CFA | PDF
(Note: As we shift to a bi-weekly publication schedule for this report in 2022, we introduce the accompanying Geopolitical Podcast, now available on our website and most podcast platforms: Apple | Spotify | Google)
We’ve written extensively about the worsening geopolitical tensions between the United States and China, which have already affected investors. For example, the Trump administration’s tariffs on Chinese imports have skewed economic developments in each country. Businesses in each country have suffered, while others have benefitted.
Looking ahead, the risks are even bigger. It’s important to stress that a U.S.-China war is not inevitable. On each side, the top leadership probably wants to avoid war. However, as each country flexes its muscles and pushes back against the other, there is a growing risk of miscalculation or mistake that leads to shooting and bloodshed. Even if the conflict became “World War III,” it would not necessarily look the same as World War II. A conflict between today’s two greatest powers would exemplify a new, unique form of modern warfare in terms of the domains in which it would be fought, the weapons utilized, the tactics and strategies employed, the alliances facing each other, and the goals pursued by each side. This report describes the likely lead-up to such a war and how it might be fought. As always, we wrap up with a discussion of the likely ramifications for investors.
Asset Allocation Bi-Weekly – #66 “The Path of Monetary Policy” (Posted 1/10/22)
Asset Allocation Weekly – #65 “What’s Causing the Yield Curve to Flatten?” (Posted 12/17/21)
2022 Outlook: The Year of Fat Tails (December 16, 2021)
by Mark Keller, CFA, Bill O’Grady, and Patrick Fearon-Hernandez, CFA | PDF
Summary:
- We don’t expect a recession in 2022. Real GDP growth will range between 3.0% to 3.5%. Inflation remains elevated, though price pressures will likely subside in H2 2022. We expect the core PCE deflator, the Federal Reserve’s preferred measure of inflation, to decline into a range between 3.5% to 3.0%. Overall CPI will decline into a range of 4.0% to 3.5%. So, inflation will remain elevated but should ease. Labor markets should slowly normalize, with unemployment reaching 4.0% by year’s end.
- The 10-year T-note will end the year with a yield of 1.85%, with an intra-year peak of 2.20%. Our base case is that the Federal Reserve will end its balance sheet expansion by mid-2022, but the first rate hike is more likely to come in Q1 2023.
- The S&P 500 will reach 5000 in 2022, approximately 6.0% higher than the expected 4700 at year-end 2021. Given liquidity conditions, we would carry an upside bias to this forecast. On the negative side, inflation is elevated, multiples are stretched, and bottlenecks and rising labor costs could eventually hurt margins. On the positive side, liquidity is ample, especially in the top 10% of households, and will tend to support equities. We favor value over growth and small caps over large caps. We remain favorable to foreign stocks.
- We still view the dollar as overvalued, but some sort of exogenous catalyst will likely be necessary to change the current bullish sentiment.
- We are bullish commodities and believe we are in the early stages of a broader bull market. Gold is undervalued on a long-term basis but is facing competition from bitcoin.
Confluence of Ideas – #23 “The Regional Threats from the Taliban in Afghanistan” (Posted 12/14/21)
Weekly Geopolitical Report – The 2022 Geopolitical Outlook (December 13, 2021)
by Bill O’Grady & Patrick Fearon-Hernandez, CFA | PDF
(This is the last WGR of 2021; the next report will be published on January 18, 2022. Starting in 2022, we will shift to a bi-weekly publication schedule and will add a new Geopolitical Podcast with each report.)
As is our custom, in mid-December, we publish our geopolitical outlook for the upcoming year. This report is less a series of predictions as it is a list of potential geopolitical issues that we believe will dominate the international landscape for 2022. It is not designed to be exhaustive; instead, it focuses on the “big picture” conditions that we believe will affect policy and markets going forward. They are listed in order of importance.
Issue #1: China
Issue #2: Russia
Issue #3: Germany
Issue #4: The Crisis in Ethiopia
Issue #5: Rising Food Prices
Issue #6: The Energy Transition
Issue #7: The Failure of the Iran Nuclear Negotiations
Odds and Ends: This section is for concerns that may affect the world in 2022 but didn’t rise to the level of an issue on our list.
Asset Allocation Weekly – #64 “The Omicron Problem” (Posted 12/10/21)
Weekly Geopolitical Report – Plunging U.S. Service Exports (December 6, 2021)
by Patrick Fearon-Hernandez, CFA | PDF
When people think about a country’s exports, imports, and trade balance, they often focus only on physical goods (sometimes referred to as “commodities” or “merchandise”). That makes some sense, given that physical goods account for the majority of international trade for most countries. Trade in physical goods can also be volatile, and it can have big implications for a country’s domestic politics. All the same, services are also a big part of international trade. In this report, we take a close look at the role of services in U.S. trade. We highlight how U.S. trade in services plummeted as a result of the global COVID-19 pandemic, and how it’s now starting to bounce back. We end with a discussion of how that plunge and budding rebound may affect investors.