Week 03. 26th of June 2022
Recession, European energy crisis, Food crisis, Second order effects for shipping, Civil unrest
Short and sweet for this week.
Markets rebounded a bit after crashing for a while. The Russia-Ukraine war no longer dominates all the headlines and the word "Recession" started appearing. Fears of a recession seem to have scared investors, with the prices of metals crashing hard, as Bloomberg notes.
EU Energy Crisis
Energy crisis in Europe as a consequence of the sanctions against Russia, is becoming a more worrying reality. We read in "Russia Today" that Europe needs to be ready for a total cut of Russian gas.
Feel free to dismiss RT as Russian propaganda — we tend to put RT in the exact same bag as all media outlets, including the Western ones, and therefore we take everything we read with a pinch of salt — however, the question remains, if Russian gas no longer flows to Europe, how are these countries going to keep the lights and the heat on?
“Emergency measures taken by European countries this week to reduce gas demand, such as firing up old coal-fired power stations, were justified by the scale of the crisis despite concerns about rising carbon emissions,” he stated, adding that, in his opinion, the return to coal-fired energy generation will be “temporary” and help keep enough gas supplies for the upcoming heating season.
Germany, Austria, Italy and the Netherlands announced their plans to step-up use of coal for power generation, while Sweden and Denmark said they would also launch emergency measures to curb the use of natural gas.
If you can't access RT or you'd like the same information from another, more legitimate source, check the following piece in Financial Times, which echoes the same points.
Financial Times, "IEA chief warns Europe to prepare for total shutdown of Russian gas exports"
Dr. Fatih Birol makes the case for "emergency measures" such as firing up old coal-fired power stations, seeing it as temporary, so E.U. can help preserve gas supplies for the winter. He also advocates building up renewable generation capacity, essentially doubling down on the existing green policies of the E.U. This means that more metals will be required (rare earth minerals, cobalt, nickel, copper, to name a few). In addition he makes the argument for delaying the shutdown of old nuclear energy power plants.
In MacroVoices podcast episode 328, which we have linked in the "Listening" section, Dr. Anas Alhajji is raising very similar points.
Food Crisis
Together, Russia and Ukraine export nearly a third of the world's wheat and barley, more than 70% of its sunflower oil and are prominent suppliers of corn. Russia is the top global fertiliser producer.
The war made the already-climbing world food prices skyrocket by preventing some 20 million tonnes of Ukrainian grain from reaching the Middle East, North Africa and parts of Asia.
Up to 181 million people in 41 countries could face a food crisis or even outright famine, UN projections show.
Shipping
In addition, the Euronews article above points out that shipping costs could go up as Ukraine seeks alternative export routes.
Ukraine's deputy agriculture minister, Markian Dmytrasevych, asked European Union lawmakers to help export more grain, including expanding the use of a Romanian port on the Black Sea, building more cargo terminals on the Danube River, and cutting red tape for freight crossing at the Polish border.
This reminds us of the potential second order effects for shipping. More conflict and route restrictions, means that different routes need to be explored, which means longer times and potentially higher costs to ship goods.
We believe we've entered a decade of increased global instability and we see the Russia-Ukraine war as one in a long series of many conflicts, until we reach a new balance of power globally. We believe in such an environment shipping companies will benefit, therefore we remain invested in them.
More Civil Unrest
We've talked about protests in our Macro Update: 02. November 2021 published on the 4th of December 2021.
The protests that erupted in Europe and other western countries, highlight the dissatisfaction of part of the society with the established politico-economical power. These only add to the existing long term trends of dissatisfaction, rooted in deep systemic issues such as extreme wealth concentrations, transition from a manufacturing to a service economy, outsourcing of manufacturing to the East and culture wars, to name a few.
We believe that the current situation with energy and food inflation only adds fuel to the fire. As the year progresses and governments fail to address the increase of living costs, we expect to see more protests:
New Middle East Balance of Power?
The following headline doesn't necessarily mean much, but it highlights a trend.
Turkey is a country that historically has always played on both sides: never fully with the U.S. and NATO, but never fully on the side or Russia. We'll have to wait and see how the following plays out and what it actually means for the region.
Listening
We've been listening to the "MacroVoices" podcasts for a long time. There are some great guests and Luke Gromen is one of them. In the following episode, they talk about foreign divestiture from US assets, gold, Russia, energy and a strengthening Ruble, inflation, recession and knock-on effects. Definitely worth listening!
MacroVoices #327 Luke Gromen: Recession with Rising Yields is Entirely Possible
Another great MacroVoices episode definitely worth your time, is episode 328 where Dr Anas Alhajji talks about oil, OPEC+, Russia and the European energy crisis.
MacroVoices #328 Dr. Anas Alhajji: There Is No Escaping The Coming Energy Crisis
Finally in uncertain times we like to go back and revisit some of the fundamentals. Check the following webinar from Goehring & Rozencwajg on the 9th of March 2022, where they discuss the ongoing energy crisis, the distortions of ESG investing and the impacts of Russia-Ukraine war. We've been following G&R for a long time and they've been ahead of the curve.
Goehring & Rozencwajg, "Natural Resources: Inflation, Capital Cycles and ESG Distortions"
Reading
Finally, on a different note, we enjoyed reading the following piece in "The New Atlantis".
Alan Jacobs, The New Atlantis, "Something Happened By Us: A Demonology":
Now, as it happens, I am myself a Christian, but I do not write here to issue an altar call, an invitation to be saved by Jesus. Rather, I merely wish you, dear reader, to consider the possibility that when a tweet provokes you to wrath, or an Instagram post makes you envious, or some online article sends you to another and yet another in an endless chain of what St. Augustine called curiositas — his favorite example is the gravitational pull on all passers-by of a dead body on the side of the road — you are dealing with powers greater than yours. Your small self and your puny will are overwhelmed by the Cosmic Rulers, the Principalities and Powers. They oppress or possess you, and they can neither be deflected nor, by the mere exercise of will, overcome. Any freedom from what torments us begins with a proper demonology. Later we may proceed to exorcism.
That’s it for this week.
Try to ignore the short term fear and look at the long term, not of the structural trends we’ve highlighted before have been resolved. There might be more pain ahead in terms of price action, but the recent sell off could be a good opportunity to add or initiate positions in commodities and energy. This of course is not investment advice, you should do your own research before deciding what to do with your capital!
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