It Was a Horrible Year This Week
This week, MWM had its quarterly client Zoom call. Thanks go out to all those we serve and to members of the MWM team for the effort put forth on behalf of our clients. Between the call and travel plans, time is tight. As a result, this week’s HAI is a slightly abbreviated update on what was a historically memorable week of price moves.
When you peel past the headlines on the Russia/Ukraine conflict and the tangled web of complicated geopolitical intrigue that surrounds events in Eastern Europe, the big story of the week was commodity prices. All week long, prices were absolutely surging all throughout the commodity complex. Prices for real tangible-goods are now in lift-off mode everywhere. I’ve never seen anything like it. MWM’s Doug Noland, referring to the size of the moves and the near universal breadth of aggressive, coordinated price gains across commodity markets said that he too, “can’t remember anything like this.” It turns out there’s good reason we can’t remember a similar stretch of such dramatic and simultaneous price increases. The last time there was a comparable week to witness was in 1974, and the last time commodity prices soared at a faster year-to-date pace was 1915. War is Inflationary, but it’s incendiary in an environment like ours that was already baking in inflationary heat.
This week, West Texas Intermediate Crude closed over $115 per barrel. WTI has now reached its highest ever price outside of a momentous parabolic spike in 2008. That price spike sent WTI to just shy of $150 per barrel before its price utterly collapsed to under $35 per barrel in the teeth of the Great Financial Crisis. Energy is the backbone of the world economy, and crude oil is the primary source of global energy. As HAI has pointed out previously, high energy prices amount to the ultimate inflation force-multiplier. The high price of energy contributes directly and indirectly to the increased cost of virtually every good and every service economy wide. After this week’s shocking 26.3% stratospheric re-rating in WTI crude, there is no doubt that we’ve got historically high prices in abundance. Like throwing a large boulder into a small pond, both the high price itself and the unstable rate of price change for the world’s linchpin commodity will send consequential impacts pulsing through the global economy. Significant impacts will be felt everywhere.
Unfortunately, surging prices were not limited to the crude oil market. In commodities markets, the week evoked eerie shades of an Austrian crack-up-boom preview. Let me highlight some unofficial price moves seen from late last week to intraday levels this Friday: Wheat +42.35%, Rice +8.79%, Oats +6.33%, Corn +11%, WTI Crude +26.3%, Natural Gas +12.21%, RBOB Gasoline +18.51%, Heating Oil +26.6%, London Gas Oil +35.94%, Nickle +21.05%, Copper +10.10%, Aluminum +14.53%, Zinc +12.16%, Palladium +26.05%, and Lumber +11.32%. All told, a truly devastating year of inflation packed into an eventful week in March.
Last week HAI flagged inflation expectations as a critical factor to watch at this juncture. Inflation expectations are currently elevated, to be sure. They remain, however, somewhat muted considering the context of 40-year high levels of actual inflation. As HAI pointed out last week, that is largely the result of an almost universally held belief on the part of the American consumer that the Federal Reserve will raise interest rates and reverse the course of inflation. In addition to the fact that the Fed is ridiculously and tragically behind the curve on inflation, it is extremely unclear how Federal Reserve interest rate hikes and other “tools” will be effective in addressing war-related impacts to energy and commodity markets. Unless the Fed is willing to try and crush economic demand to the absolute bare minimum, the stage now appears set for American consumers to suffer a major disappointment on expectations that the Fed will soon remedy the inflation problem. To that end, the events of this week landed an incredibly serious blow to the already frayed thread keeping inflation expectations relatively anchored. In the event that inflation expectations spike, a full-blown inflation psychology would threaten to take hold of consumer behavior. If that happens, as far as inflation is concerned, Dorothy will no longer be in Kansas anymore.
To make matters worse, a grossly overvalued financial asset bubble, decade-low levels of consumer sentiment, and the risk of slowing growth further complicate a seemingly impossible bind for the Federal Reserve. While parts of the economy are still strong, the clear risk remains that the Fed will be tightening financial conditions directly into a growth slowdown. As of this week, the latest Atlanta Federal Reserve GDPNow model estimate update for Q1 2022 real GDP growth now stands at 0.0%. An already difficult job for the Federal Reserve keeps getting more challenging week by week. All eyes next week will be on events in Eastern Europe, commodity markets, and the latest CPI release. These factors will set the tone for the important Federal Reserve FOMC meeting the following week.
Regardless of which direction you look these days, events are incredibly serious and the stakes extremely high. Whether it’s officials considering geopolitics or economic policy, lets hope that policymakers can rise to the occasion with wisdom, skill, and the ability to make the right tough choices.
Brilliant journalist and economist Henry Hazlitt illuminated an excellent set of distinctions between the bad and good economist. His observations are as true in the political sphere as the economic. Hazlitt observed that, “The bad economist sees only what immediately strikes the eye; the good economist also looks beyond. The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences. The bad economist sees only what the effect of a given policy has been or will be on one particular group; the good economist inquires also what the effect of the policy will be on all groups.”
Bad politics and bad economics, compounded over years, have led us into this dangerous minefield. Let us hope the time has come for good politics and good economics to reemerge en masse and blaze a path forward to a better tomorrow.
Weekly performance: The S&P 500 was down 1.27%. Gold was up 4.19%, silver was up 7.37%, platinum gained 6.35%, and palladium surged 26.05%. The HUI gold miners index was up 8.62%. The IFRA iShares US Infrastructure ETF gained 3.25% for the week. Energy commodities were higher, to say the least. WTI crude oil was up an astonishing 26.30%. Natural gas gained 12.21% on the week. The CRB Commodity Index was up 13.43%, while copper gained 10.10%. The Dow Jones US Specialty Real Estate Investment Trust Index was up 2.83%, while the Vanguard Utilities ETF (VPU) was up by 4.77%. The dollar had a huge week and was up by 2.12% to close the week at 98.67. The yield on the 10-year Treasury was crushed, and ended the week down 23 bps at 1.74%.
Have a great weekend!
Chief Executive Officer