Companies faced the spike in inflation to boost their profit margins – a phenomenon known as greed inflation. As a result, consumer prices have probably risen more than warranted, with cash hoards built up thanks to the expansionary fiscal policy of governments around the world during the pandemic making consumers less price-sensitive.
Margins rise again as food prices fall because those declines are not passed on to the market. The highly competitive supermarket industry is in the crosshairs of regulators, but regulators don’t want to identify the real culprits: the big food and goods producers.
Inflation is coming down at a suspiciously slower rate this cycle than in the past.
Another anomaly is the way in which much higher official interest rates do not affect corporate behavior as much as the Federal Reserve might expect.
Large companies with direct access to capital markets are benefiting from the increase in debt, with extremely low interest rates during the pandemic. Now they park cash that earns more interest than the coupons they pay bondholders — providing a windfall.
The medium-term outlook remains unclear and that excessive central bank intervention over the past 15 years has only delayed the economic reckoning.
Europe is already in recession, with the US not far behind. Policymakers are ignoring sharp declines in both the money supply and bank lending, as these contractions raise the risks of a hard landing.
A recession is always accompanied by an inverted yield curve in the government bond market, even though short-term interest rates have started to fall.
Governments and central banks are unlikely to step aside and allow some Schumperter-style creative destruction from a recession, which could correct some of the wrong policies of the last decade.
The pandemic has enabled governments to set aside the red lines of fiscal discipline and pump money directly into households.
Central bankers may have reversed monetary policy, but fiscal excess continues unabated.
Zombie companies
Too many zombie companies will need bailouts to curb rising unemployment. A period of interest rate cuts will begin – even a return to quantitative easing as deflation is expected to re-emerge.
The Netherlands and Belgium are already experiencing negative inflation, while deflation is too aggressive for China’s economy – which could exacerbate deflationary trends worldwide.
US 10-year yields will return to below 2% after climbing to 5% in mid-October – although a return to the record low of 0.65% in 2020 is not forecast.
Shares
Stocks will follow a downward trend simulating the bursting of a bubble.
Many companies never experienced a recession, as even the 2008 global financial crisis brought benefits to the new economy.
With tech accounting for a third of US stock market capitalization and the Magnificent Seven (Alphabet, Apple, Meta Platforms, Microsoft, Amazon, Nvidia and Tesla) having risen by two-thirds this year, bullish valuations could run out of steam. “fuel”.
In any case, layoffs and bankruptcies in the logistics sector should be expected, foreshadowing revisions of profits on hand.
Of course, a safe haven until the crisis is over is the safety of gold.
