The last two and half years have been anything but, placid. Thanks to the pandemic and the resultant loss of lives and livelihoods, life was challenging and grim. How we wish we “go back in time” to 2019 when things seemed “normal”, at least!! As 2020 and 2021 passed, this year dawned with some hopes of revival and rejuvenation, with the virus receding somewhat and the global economy showing some “green shoots”. Indeed, with back to office and hiring resuming, we thought the worst was behind us. However, there are enough signs that 2022 would be as bad as the earlier two years, or even worse, which I somewhat suspected. For instance, the pandemic era propping up of the global economy through the easy money and the aid packages that were implemented by nearly all countries worldwide, have led to inflation, which is now prompting Central Banks to “hike” interest rates. I believe that this “tapering and tightening” would put an end to the “steroids fueled” economic recovery that raised hopes earlier. Worse, with muted demand and a full-blown supply chain crisis, the stagflation (a combination of stagnation and inflation) that is “depressive” has emerged, which means that we are on course for a recession (already the United States reported a contraction in the last quarter).
Of course, if the pandemic were the only thing that was threatening a recovery, then we would have found a way to manage it, with vaccines and strict containment measures in place. What has really upset the “apple cart” is the Ukrainian war that has dashed all hopes of an “orderly” New Normal. Instead, with crushing sanctions on Russia, it almost looks like it would default on its foreign debts, a “historic first” since the Bolshevik Revolution of 2017. Though Russia has “managed” to stave off default on May 4th on a Dollar-denominated bond, there is another “booby trap” looming after May 25th where the “leeway” to use special arrangements to pay would cease. In effect, Russia would be “on its own” in June, meaning things can go downhill pretty quickly. Moreover, with existing and proposed “bans” on Russian oil and gas, both Europe and Russia would be squaring off each other, as well as jeopardizing the nascent European recovery and “strangling” Russia to the extent that it can even lead to a complete collapse of its economy. Already, there are some voices predicting that May 9th would be the “day of reckoning” , though I believe we might have to wait until June for the effects to be felt. So, there is enough turbulence already.
The next shoe to drop can very well be China, thanks to its Covid Zero policy, which has locked down entire megapolises like Shanghai, with Beijing on edge, and the “overheated” real estate sector, that is now in a slow-motion collapse. Indeed, the Chinese economy has been on the ropes ever since the Evergrande and other real estate firms started to miss payments, sometime last year, and reality cannot be avoided any longer. To explain, the Chinese are notorious for their “opaque” ways of managing the economy and the country, as well, and despite pretending that “all is well” since September last year, there are enough signs that The Great Leader, Xi Jinping, is losing control. Evergrande cannot be “wished away” and Covid can’t be “hidden” from the external world. Add the loss of production and the delays in shipping goods, the supply chain crisis that I mentioned earlier and the worsening domestic economy means that its trade-dependent model is under severe strain. It is a matter of time before the full extent of China’s “troubles” would be laid bare, and Xi and his cohorts can only “delay the inevitable”, before widespread social unrest and other forms of stress and strains would lead to its implosion.
So, Russia and China can very well be the “canaries in the coal mine”, as predictors of turbulence and the other crises related to our very own neighbourhood, where Srilanka, Pakistan, and Nepal are already reeling under debt events. While Srilanka has defaulted and Pakistan is seeking bailouts, Nepal might very well be the next South Asian domino. While this can be music to Indian nationalists, who can boast about how well we are doing, there are some warning signs here as well, since inflation and the “disappearing workforce” where Crores of Indians have actually stopped “looking for jobs, points to an approaching storm. Moreover, the Indian property market is also over-leveraged, which can lead to a systemic crisis anytime. For actual details, one can refer to the Noida and other urban areas, where inventories have piled up and the developers are deep in debt. In addition, India’s easy money policy cannot continue indefinitely and sooner or later, the RBI (Reserve Bank of India) has to raise rates. Apart from this, the common person feels screwed so much, despite the impressive growth rates, which is food for thought for the Indian policymakers.
Last, given that all these crises are “interlinked”, one wonders where all this is leading. My guess is that we would be witnessing some sort of the effects of all these converging crises sometime in July, when the burgeoning “food and commodity” crisis runs into the above crises, leading to a Perfect Storm of turbulence ahead. So, fasten your seat belts and buckle up for a wild ride, that is approaching. In short, The Global Economy is on life support, and it remains to be seen as to whether the Powers That Be “pull the plug” or allow the Zombies another lease of life. There would be severe storms either way, and it really looks like it is 2008 again when the Great Recession started, the effects of which are being felt even now. To conclude, it would be prudent to invest in assets that are “backed” by guarantees and maintain some liquidity, while also hedging in gold and silver!! investing in the stock market would be akin to playing with fire for novices and best left to seasoned investors.
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