The Six Horsemen of Global Recession | Nucleus Investment Insights

[@Ryan-dz3jo]

Another fantastic discussion. Hopefully your audience grows.

[@iskundi8027]

Brilliant discussion and content as always. The best channel of its kind in Australia and is super underrated.

[@RoryVanucchi]

Great points

[@davidbarry6900]

Question re possible risks in later part of 2022 due to famine. Prelude: Peter Zeihan posits that the Ukraine war is disrupting resource exports from Ukraine and Russia, probably for at LEAST 6 months after the (hoped for) end of any hostilities, whenever that happens - and sanctions may persist or internal Russian economic collapse may delay recovery for much longer of course. The main resources affected are of course Oil and Gas (i.e. prices are likely to remain high for several years, and the EU is especially at risk), but also grains and seed oils (i.e food), fertilizers, and significant amounts of various other commodities, including Palladium and Neon. Shortages of the latter are likely to affect computer chips and car manufacturing, i.e. cause significant further supply chain disruptions in the global economy this year. However, the biggest unknown impact is from the projected famine that is likely to affect large parts of Africa and the Middle East, possibly China too, within six months (mainly due to fertilizer shortages/cost increases, but also hits to grain exports from Ukraine/Russia). Zeihan expects the possibility of insufficient calories for a billion people, which implies a massive amount of unrest (or revolts) in affected areas, plus large scale refugee migration to anywhere that might have food (Europe, South Africa?), plus possible large-scale famine relief efforts, plus significant economic breakdown in affected areas of course. If that scenario of broad famine in many parts of Africa, Brazil, and Asia occurs (USA is likely to be spared, and I don't think Australia would be directly affected either), what are the potential impacts on US and EU stock markets and economies? (Australia too, for those concerned?) Most African economies are relatively small and should not drag down the bigger economies directly. However, economic/social disruptions may affect specific commodity production, e.g. Cobalt, which could affect specific product lines on a global basis (e.g. EV batteries). Are there any other systemic risks if, say Egypt has a social collapse, or are there any other countries to which we should pay special attention?

[@damienklassen3338]

Thanks David. I think there are some relatively large risks around food over the next 6-12 months. For developed countries, and their stock markets this means higher food inflation but not that much of an effect on final prices. For example if the wheat price doubles then the price of bread in Australia might rise only $0.15-$0.25 per loaf. Markets and prices are efficient at balancing demand and supply, thus delivering goods to who will pay the most. So, if we have 10% less food then it is likely Zeihan will be right - developed markets will simply pay the extra food costs and emerging markets will go without. There is some scope to switch livestock feed between crops, which helps to balance out shortages in one crop over another, and keep in mind that India and China will likely buy Russian crops. But, if fertiliser prices are too high then the shortages will be in all crops. While from a humanitarian aspect famines will be devasting. Typically they do not meaningfully affect developed markets. Social collapse among large energy producers will be the key one to watch. The Arab Spring a few years ago co-incided with regime change in a number of those countries.

[@robertmeyer6674]

I expect US PCE headline inflation will fall back to 3% in the next 12mths using a CL YoY model which shows many times where actual inflation spikes late and 50% above the model as it is now. That removes a lot of tightening from the rate projections currently. Crude is overbought here. I think the Ukraine conflict may well have peaked. Europe isn't about to abandon Russian oil & gas completely. The dire EZ & China economies as you cover are bullish DXY which is generally deflationary. The 30yr spike in rates isnt always deadly for US housing starts and will soon reverse with inflation fears anyway. The US Real GDP - Potential Real GDP (FRED) output gap is not closed yet which is bullish the cycle. US industrial production is running 7% YoY, non farm payrolls >4% YoY. Such strength is not consistent with an imminent recession. Given I don't see this inflation spike continuing at all, we are probably not in the 1970s analog where high IP and NFPs unusually preceded recessions. Market indicators of the economic cycle are bullish: Copper Gold, SP1000 Cyclicals-Defensives. So I can easily see a few more months of support at least for SPX.

[@damienklassen3338]

Thanks for the detailed thoughts. I think you are looking at the right indicators - the question is really whether the US can power through a EU, China slowdown and higher rates. If the US can then you will be right.