We're in the 21st Century, But...
What negotiations?... The war drags on... We're in the 21st century, but... Europe might be in a recession already... Oil is at the crux... Central bank help isn't coming... The same old problems...
Unfortunately, no end to the war in Eastern Europe is in sight...
It's more than a month into the war in Ukraine, and the questions "What's next?", "How bad?", and "How long?" are as relevant today as they were in mid-February, when Russian troops started gathering en masse near the Ukrainian border...
Russian and Ukrainian officials keep meeting to talk about peace... Though unsuccessful, it is better than not talking at all, but it's hard to imagine how productive the discussions could be when the bloody war on the ground is dragging on, and only getting worse...
Over the weekend, we learned that control of Ukraine's capital city of Kyiv is now back in the hands of the Ukrainians, but as Russian forces retreat from the area to regroup, what they've left behind is sickening...
We'll spare you the details, but U.S. President Joe Biden today called for Russian President Vladimir Putin to stand trial for "war crimes" after video from the town of Bucha, northwest of Kyiv, showed horrifying civilian atrocities and compelling evidence for a guilty verdict.
More than 300 residents were killed, according to the town's mayor. Ukrainian President Volodymyr Zelensky accused Russia of "genocide"... Meanwhile, the Russian defense ministry said the scenes recorded by independent journalists were "stage managed," meaning fake.
Talk about being worlds apart. What could they possibly negotiate now? But Zelensky says he will keep trying...
Because Ukraine must find peace. We are in 21st-century Europe. We will continue our diplomatic and military efforts.
The odds that the war ends soon are getting longer each day...
We may be talking about 21st-century Europe, but we're also talking about the kind of bloody power struggle that has happened for as long as nations have drawn borders, formed governments, and competed for resources.
With his second claim of Putin being a "war criminal" in just a few weeks, what Biden – and others, the French president joined in today – could be signaling is that the only way to end the war in Ukraine is if the Russian president is forced out of power.
If that happens at all, it's going to take a while, short of an assassination... It took six years, ending in December 2020, for the 123-nation International Criminal Court in The Hauge, Netherlands to issue a "preliminary" report on Russian crimes in eastern Ukraine dating to 2014.
And as far as what this means for the economy and the markets, the broad themes we've been talking about for the last several months in the Digest could catch more tailwinds, for even longer than imagined...
As I (Corey McLaughlin) will explain today, I'm talking about the expectations for more inflation (goodbye, Russian oil in the "West" and Ukrainian wheat everywhere), slower global economic growth, and long-term fallout from more sanctions to come on Russia...
Be prepared for all of it. Apologies to be a bearer of bad news, but ignoring reality does no good... But more to the point, there are ways to prepare your portfolio – like making sure it is truly diversified, including high-quality stocks, gold, and cash.
Up first, Europe might already be in a recession...
That's according to a report from our Stansberry NewsWire editor C. Scott Garliss.
As Scott wrote today, German-based, behavioral-science and data-analytics firm Sentix reported that eurozone investor confidence has dropped significantly enough in a short period of time to say that a European recession has begun...
For more than 20 years, the firm has conducted a monthly survey of thousands of investors and financial analysts ‒ covering retail and institutional universes ‒ and asks those individuals about expectations for markets, the economy, and their portfolios.
In Europe, April's numbers showed a dramatic decline in optimism, down 11 "index points" to negative 18. Anything below zero is a pessimistic indicator... This is notable because in a recession, investor sentiment typically craters, along with asset prices.
The results from Sentix's April survey marked the lowest sentiment reading since June 2020, during the COVID-19 lockdowns, and marked the second consecutive month of negative results following a year of positive numbers.
According to the firm's managing director, Manfred Hübner...
Since the situation is now also negative, the beginning of a recession must be assumed.
In Germany, which is facing an energy crisis given its traditional reliance on Russian oil and its decision to ditch nuclear energy plans in recent years, expectations today are at their most pessimistic level since January 2009.
And the negative sentiment is not limited to Europe. The U.S. economy, Hübner said, is "only" in a cyclical downturn, but one that is increasingly gaining negative momentum. And he continued about the rest of the world...
Internationally, the declines are smaller, but the trend is the same everywhere. Both the situation and expectations scores continue to fall. No region is currently able to resist the negative momentum. Even the important Asian region is already struggling with stagnation.
Enter into this scenario the fact that the European Union is preparing more sanctions on Russian jet fuel, steel, and luxury goods, and there is a recipe for more commodity shortages and skyrocketing prices in Europe and beyond...
The most critical commodity is oil, of course...
We've said it more times than we can remember...
The world is still addicted to oil, no matter how many people might want alternative-energy sources to be the "thing" right now... Even before the war in Ukraine, the fundamentals were in place for higher oil prices in the years ahead...
Demand was already likely to outrun supply, as the oil industry was still getting back on its feet after the depths of the pandemic. Plus, more investment was being made in alternative energy than in the oil supply that we rely on not just for energy, but to make plastic, computers, and a number of items.
As we wrote in an August 2021 Digest, back when oil was trading closer to $70 per barrel...
While the popular play today is to bet on alternative-energy investments – and for good reason, with the government throwing all kinds of financial support behind electric vehicles, for example – the truth is... the world's oil habit is going to be a hard one to kick.
It will happen much slower than many folks might expect.
Then Russia invading Ukraine did the below, as we wrote in the March 8 Digest...
Market analyst Jim Bianco, who gives macroeconomic guidance to institutional investors, shared this comment and chart on Twitter the other day... when oil moved higher than $100 per barrel. He said...
Not every recession is led by a 50% rise in crude. But every 50% rise in crude has led to a recession.
Is this time different? We hope so... but hope is not a strategy.
It doesn't take a lot of thinking to pinpoint the added expenses that will reverberate through the economy... and eat into corporate growth and the pockets of people on Main Street.
This is why every major oil shock has preceded a recession. They were surprise hits to economic growth.
The decision to essentially reroute a lot of Russian oil from the West to places like China via economic sanctions has only accelerated the trend of higher energy prices, and sent gas prices above $5 in some parts of this country...
Similarly, the war in Ukraine has sped up the drawing of new battle lines in a "currency war" that will likely be fought over the next decade or so, too...
It's also rekindling memories of the 1970s inflation era, when folks dealt with gas "rationing" and the like... Over the weekend, German politicians suggested to their citizens they ride bikes or take a bus or train instead of driving gas-powered cars...
The European Union hasn't banned Russian energy, only because it might hurt themselves more than it would hurt Russia...
Last week, Biden announced the U.S. will release up to 180 million barrels of oil from the Strategic Petroleum Reserve over the next six months in an effort to bring down high fuel costs. This would be the biggest release of oil reserves since they were created in 1974.
After that announcement on Thursday, oil futures prices fell about 5%. But both Brent crude, the international benchmark, and West Texas Intermediate oil prices are above $100 per barrel and remain in long-term uptrends...
Then there's the Federal Reserve...
The central bank says it is dead set on hiking interest rates (to slow demand, it can't do much about supply) in what is likely an already-slowing global economy...
And they're doing that – Mistake No. 2 – because they've been so far behind the curve on inflation – Mistake No. 1 – or were ignoring it to suit the government's own debt interests – Mistake No. 1a...
Just how far behind the "curve" is the Fed on inflation?
Further than ever... The chart below tells the story...
It shows the federal funds rate, the number that's referred to when we talk about the Fed raising or lowering interest rates, minus the median Consumer Price Index ("CPI"), a widely used measure of inflation...
Talk about "unprecedented"... At least since the mid-1980s, when this data begins, we've never seen a period of higher inflation and lower interest rates...
Lower rates mean the central bank is keeping things "easy" for the economy to grow, which sounds good... unless inflation gets out of hand. That's what we see today...
If you look close at the chart, you may also notice that when the difference between interest rates and inflation has been increasing (or falling on the chart) at the rate it has been recently, a recession has often followed...
Here's the concern today...
If the Fed is to have any shred of credibility left in its halls of power, there is no possible way it could lower interest rates right now to help the economy, not with inflation at record levels.
Maybe the central bank could lower rates now if it had started raising them earlier, back when it was clear that the economy was "running strong" throughout 2021. Instead, it just let zero rates go on and on...
So, we're here. In his report today on Europe possibly already being in a recession, Scott wrote something that we haven't seen too many other people talking about – yet...
Unlike in recent downturns, central banks don't appear to have the capacity to introduce more stimulus. All of the extra liquidity introduced to the financial system to fight the pandemic-driven downturn has created rapidly rising inflation.
The Federal Reserve is saying it will have to raise interest rates to 2% from the current range of 0.25% to 0.5%. Its members have also suggested starting to shrink its $9 trillion balance sheet at the next policy meeting in May.
The European Central Bank is in a similar spot. It is currently trying to wind down its bond purchase program. Originally it was targeting the end of this year. But now, with inflation continuing to increase, it said asset purchases will likely end in the third quarter and rate hikes could begin soon thereafter.
In other words, all that "easy money" that the economy and markets have come to rely on is not coming this time, at least not yet... and everyday folks on the ground are going to pay the price.
Folks are already talking more about spending less. In the U.S., as we noted in the March 17 Digest, surveys of consumer sentiment are reaching new lows... In Europe, investor sentiment is crumbling, as we mentioned earlier...
We now could be releasing 1 million barrels of oil from the U.S. strategic reserves per day for the next six months... And, yes, somehow we must replenish them because, when this crisis is over, we'll still need oil to live comfortable lives day-to-day.
It's the 21st century, yes, and unfortunately, we still have the same age-old problems.
When's the Recession Hitting?
Our editor-at-large Daniela Cambone welcomed Alfonso Peccatiello, author of The Macro Compass newsletter, to get his thoughts on the inverted yield curve... and when he thinks a recession might hit the U.S.
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.
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In today's mailbag, a few of you came through with some jokes following our April Fools' Day request in Friday's Digest... Do you have a question, thought, or comment? As always, e-mail us at feedback@stansberryresearch.com.
"Did you hear about the award-winning cheese? It was legend dairy." – Paid-up subscriber Keri G.
"I was wondering if you knew that the original maker of the door knocker won the no-bel prize." – Paid-up subscriber Jeff C.
All the best,
Corey McLaughlin
Baltimore, Maryland
April 4, 2022