š Market Commentary for 2022-Q1
This quarter, we look at the Ukraine conflict's impact on global food supply, the recession risk with the Fed's actions, Japan's divergence, and the accelerating adoption of digital-crypto assets.
We conduct in-depth investment research and provide commentary on the most significant market events of the previous quarter and provide an outlook for the current investing environment.
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Major Geopolitical Events Produce Major Shifts in Commodity Markets.
The Ukraine Crisis will lead to global food scarcity challenges and civil unrest, especially in the Middle East.
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The Ukraine war will have indirect reverberations that will extend far beyond the combatants in this conflict. Indeed, they may have ripple effects that create new geopolitical risks globally.
The inflationary effects of war on global grain supply are particularly concerning. Ukraine and Russia are responsible for about a quarter to a third of the world's wheat exports, supplying food to developing nations in Africa, the Middle East, and Central Asia. Many Ukrainian farmers are already abandoning their fields right at the start of the sowing season to defend their country. In addition, in the face of crippling international sanctions, Russia may cease all wheat exports. The current situation suggests that a global food shortage may be looming, particularly in countries that rely on these grain supplies - Congo, Egypt, Qatar, Lebanon, Kazakhstan, and Azerbaijan. The rising cost of agricultural inputs, such as energy, transportation, and fertilizer, may also exacerbate food price inflation.Ā
This situation resembles that before the 2011 Arab Spring uprisings when massive revolts overturned Egyptian and Libyan governments. People adjust by paying more for food and less for discretionary activities (leisure travel, entertainment) in developed countries. However, hunger is a real threat in developing countries, as food costs can make up a decent amount of an individual's spending. Such conditions can spark civil unrest and social tensions, and we are already seeing an uptick in violent incidents in Israel.
The Possibility of a Recession Looms as the Fed Hikes Interest Rates.
Equity markets have been discounting the impact of the Fedās actions.
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As we all know, the Federal Reserve has a dual mandate: to keep prices stable and keep unemployment in check. Given the current low level of unemployment and record levels of inflation, the priority of the Fed should shift to combating inflation, which involves the withdrawal of monetary support and the raising of interest rates. However, current events force the Federal Reserve to choose between a rock and a hard place, between inducing a recession or allowing potentially destabilizing inflation to persist. Policy error is a highly probable scenario, and the track record of the Federal Reserve in engineering a "soft landing" historically is low.
Since ourĀ very first published commentary, Conscious Capital Advisors has been warning investors about the potential risks of the U.S. Federal Reserve's easy money policies, which have been in place since 2008, and have accelerated in 2020. We have highlighted the Fed's actions every quarter intentionally, as much of the behavior in financial markets in the past 14 years can be explained by the Fed's loose monetary policies.
As of March 2022, risk assets are discounting the impacts the war may have, even as the geopolitical situation doesnāt seem like it will de-escalate. War, at least in the early parts of it, is a pathway for potentially weaker global growth, as inefficiencies increase due to the fighting.
Japan Leaves Easy Monetary Policy in Place.
Takes advantage of the current geopolitical situation for resolution on the Kuril Islands.
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While the rest of the financial world focuses on the Fed and the ECB raising rates, one country is bucking the trend regarding monetary policy: Japan. The BOJ Governor, Haruhiko Kuroda, is determined to continue with its unlimited JGB buying program pegged at 25 bps, bucking most Western economies, which have begun or are beginning to tighten financial conditions. As a result of this monetary policy, the Japanese Yen ("JPY") has been one of the most battered currencies for the past quarter globally.
The Bank of Japan's bond-buying program intends not to devalue the JPY but to outgrow deflation by targeting inflation. The policy seems to be benefiting the Japanese economy, as wages are rising in the country, and economic growth is accelerating. These economic improvements are especially needed as Japan begins to confront Russia militarily in the Kuril Islands.
The Kuril Islands are disputed territories between Russia and Japan. Located off the coast of Hokkaido, they are surrounded by rich fishing grounds and have offshore oil and gas reserves. It's one of the world's oldest territorial disputes and the main reason why Russia and Japan didn't sign a peace treaty after WWII. Tokyo shares the global outrage at Putin's invasion of Ukraine and the attack on the international rules-based order. Japan wants to show solidarity with the G7 and strengthen the US alliance.
Digital Asset and Cryptocurrency Adoption May Be Accelerated By Sanctions.
Could support the facilitation of trade in emerging market countries, such as Latin America, Africa, and Southeast Asia especially.
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BlackRock CEO Larry Fink believes that the Ukraine-Russia war could have a late āpotential impact on accelerating the adoption of digital currencies.ā Global capital access allows companies to grow, countries to develop, and more people to prosper financially. Recent sanctions levied by Western economies against Russia have shaken traditional global payment systems, and digital currencies could see wider adoption as the technology fills a role in inter-state capital transfers, especially in emerging markets such as those in South America, Africa and the Asia-Pacific.
āThe war will prompt countries to re-evaluate their currency dependencies,āĀ Fink wrote on March 24. In fact, several governments sought to take a more active role in digital currencies and define their regulatory frameworks before the war.
Fink emphasized the use of digital currencies for cross-border payments, a point echoed by other experts. āA well-designed global digital payment system can improve international transaction settlement while reducing money laundering and corruption,ā wrote Fink. āDigital currencies can also help reduce the costs of cross-border payments, such as when expatriates send money home.ā
Written by Joseph Lu, CFAĀ®
Joseph is the founder and managing director of Conscious Capital Advisors and a CFAĀ® Charterholder.
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