Kopi Time E067: Year-end commentary: Testing the guardrails

mm hmm.

Welcome

to Kobe times, final episode

of 2022. I'm tamar chief economist coming to you without

a guest with our year and commentary.

We

called our 2021 Outlook a

bifurcated world and

the year lived up to that thesis. The global economic recovery was extremely uneven from vaccine distribution to the impact of the sharp

rally in asset

markets. Both of

those favored the wealthy. And let's also not

forget all the fiscal

and monetary support. They were of course the

most supportive in nations

with the most were brutal.

A globally

coordinated approach to distribute medical equipment

and vaccines. On one hand,

financial support on the other hand would have shortened

the duration of the pandemic

and soften

its blow to

livelihoods. But that didn't happen

unfortunately.

And predictably

Our 2022 Outlook is titled

testing the guardrails.

The bifurcated world after delays and missteps

has built some

guardrails admittedly vaccine

production is up and distribution is becoming more. Even economies are opening up with vaccinated

travel lanes.

Strong demand for manufactured goods

and commodities is

helping the emerging

markets that export

them funds

and facilities from multi laterals

for short term challenges like debt repayment

and buying medical

equipment and for long term

challenges like

transition to renewable

fuels. They

are becoming increasingly

available hands 2022 Ought to be

characterized by strong consumer

demand in developed markets

and a substantial reopening

dynamic in emerging markets

clouded of

course attacked by U. S. Monetary policy

moves.

But the omicron variant

threatened to spoil

that narrative to some extent.

Even if it turns out to have more

bark than bite? Basically what I'm saying is it's very

infectious but turns out to be

not particularly lethal. The world's

vulnerability to variance

is will underscored

by these developments and that again sheds harsh light on the danger posed by the global vaccine. Inequity

markets therefore will remain

on the edge with inevitable news flow of this nature.

Now beyond the

pandemic,

let's talk about the

other big elephant in the

room inflation. The inflation

debate, supply versus demand

temporary versus

structural

has run its

course with policy liftoff from the emergency accommodation very likely to be the

big team

For 2022. The US Fed would

have to balance inflation risk against keeping the economic recovery intact. That's the key challenge

inflation out turn

in the U. S. Gets most of the headlines. But the phenomenon goes beyond

its domestic factors like strong stimulus tight labor market and will

affect stemming from a

frothy asset market.

In fact

many items in the consumer price

index in the

U. S. Or elsewhere that have soared lately are

taking their cues

from global

prices

given the prevalence of common

factors like natural gas,

petroleum fertilizer and a

range of food items inflation

unsurprisingly has picked up in the euro area and the U.

K. Although not

as sharply as in the

US right here in Singapore inflation has picked up in recent months With headline inflation running at three

.2% through

october although the year to date

average price level is

Up only about two

over the corresponding

period last year.

What about

emerging asia? Well, china India and Indonesia have

not yet seen comparable

upward pressure to

prices reflecting subdued domestic demand, an

incomplete pass

through of world prices at the local pump level. Still inflation by no means is a non issue in India

and there is a risk of fuel

prices being raised in china and

Indonesia at the component level.

Energy prices

admittedly have soared this year

and demand some degree of

scrutiny from us.

Think about

it, demand for energy has jumped

due to trade rebound with

gas prices jumping on account of low stock and strong

demand, especially as

coal usage has been discouraged

on oil. Opec kota has held up

shale production in the U.

S. Has been poor

and transportation demand

has jumped with economic reopening

then

there is call which has suffered from pandemic induced

supply disruptions

in all cases though,

supply is coming back gingerly, but it is coming back

outside of

industrial economies. On the food price side, we have seen major development

with respect to rise in soybean. These are important ones. They have a lot of

political and social sensitivities and there are reasons to worry about these prices and also quote for broader

range of prices

on the rice

and soybeans side, they

rose a lot last year. Uh They

have somewhat moved

past the pandemic

induced supply crunch and some idiosyncratic

factors. For example, in china last

year there was a major driver

for soybean demand

and prices because there was a

spike in soybean based feedstock demand.

But these

things have somewhat run its course,

but not everything.

If you think about cereals

beyond rice, uh coffee,

sugar, meat, fish, edible oil,

these things have gone through major

supply shortages while

they have had to keep up with sustained global demand of these food items that I just talked about.

There is no major

driver of supply demand dynamic to ease anytime

soon. You see

food production

is somewhat inelastic in the

short run and

climate change related events are causing crop failure with increasing frequency.

So there is reason to

worry here. If elevated food prices is a given that would cause considerable

stress in developing societies that are food important dependent. Another risk for them is

that the US

dollar strength, which is probably likely next year around taper and rate increase

that would also push

up the import costs for developing countries.

No, there is a good chance that energy

and food prices won't keep

rising, will remain high but not necessarily keep rising

because there would be some

degree of demand adjustment. You may have um in elastic supply, but there's a limit of how much we can buy these things at very high levels. So demand would have to adjust to some extent. But one area where demand looks rather in elastic is base metals,

demand for various metals

related to electronic

manufacturing continues to

soar as the

world turns more digital and energy transition efforts gathered momentum,

low

greenhouse gas technologies including renewable energy, electric cars, hydrogen

and carbon

capture. All of these

things require more metals than their fossil fuel based counterparts.

A multiyear

rally in metals, industrial metals, that is

look

pretty likely to

us all. The high prices of metals such

as cobalt, copper,

lithium and nickel could

inadvertently cause

delays in climate transition. So that's one major downside

interestingly. And finally

on the inflation side,

precious metals would be obvious

candidates for a rally at this juncture

as their historical role has been to act

as a hedge against a broader rise in the price level, oddly, that has really not been the

case. Now.

Earlier, gold and silver bowl jumped. That's during

the uncertainty heavy phase of the pandemic

for last year.

But since

then gold has been largely

flatter week

while silver

jumping on the back of

demand uh, do from coming from china

has corrected lately.

Also with china's

slowdown. What does that tell us? Well, to me that

is a major verdict from the

market that it is fairly sanguine about the medium term inflation scenario. So there's a

lot of discussion about the near term inflation

and we recognize

some of those risks,

but for the medium term market

based indicators are telling us there isn't that much to worry about.

That's

That for inflation, let's move on. What are the other risk factors for 20

22? Well, first in that list is the state of the asset market

marked by historically high evaluation across the spectrum. While interest rates, liquidity and

investor appetite

remain conducive for that fraud to

persist. The

space between profit

taking and a downward spiral

is narrowing because of such lofty levels.

Unlike the

chinese authorities who appear impervious to asset price correction

to some extent,

the Fed faces

tremendous pressure to support the markets and

Therefore 2022 will

brings several

tests for the Fed, which

would want to go ahead with paper and rate increases, but at

the same time would would not want to undermine asset markets in a very

big manner because

then the negative wealth effect can

percolate through the system and cause the

recovery to falter. The second risk factor

is china. The global

economy and markets

took notice of china's market

sell off and economic slowdown

In 2021. But there was actually very little spillover.

That's surprising given china's

large scale. Now,

just because that didn't

happen in 2021 doesn't mean it will not happen in 2020

two. So we think that further correction in china, be

it from pandemic resurgence regulatory crackdown or power

shortage could

put a major dent

in global demand and investor sentiment next year. So watch out for

that 3rd, dealing with the fiscal cost of the pandemic. Now, many countries have

seen their debt

GDP ratio go up by

15 to 30

over the past couple of years,

regardless of the level of interest

rates. The time to stop adding to debt has arrived,

which would require both healthy GDP growth

and reduction in fiscal support.

So you need

GDP to continue to grow that can add or stop addition to grow debt

GDP to go up

or you can start cutting back on

fiscal support, which can also then reduce the fiscal impulse and debt

creating flows.

Now this is going to be a challenging act to say the least with a high

chance of a few

sovereign stumbles. You

can't really orchestrate

a slaughter on the debt market without

some stumbles here and there. You have already

seen that in some parts of the

world. So these risks are likely to

manifest outside of Asia

more so than Asia.

But the stress could certainly spill over to these shores. Coming

back to the Feds forthcoming

challenges. Even if developed asset markets managed to handle the liftoff.

Two questions will linger. First,

would inflation come down with a bit

of policy normalization

or would it require

forceful crow

dampening action.

Second, would

emerging markets be able to

handle the lack of volatility in

capital flows that

would accompany the Fed

moves. So lots to worry about, but it is important to play called attention

to these risks.

Surely there is also a good chance that it could all

work out next year.

These are

not some very, very aspirational points.

I'm about to make consider the following in the near term. The

transition to an endemic

Covid could keep

progressing. Put aside omicron

for a second. Think about the

wider picture,

vaccination. Rollout of antiviral treatments, herd immunity being

built up Well then maybe we are actually

not at a very scary part of the

pandemic, but we're actually the final chapter of the pandemic. Then there's the issue of

supply side bottlenecks,

especially at the ports. They're going

to ease the consumer demand may remain

resilient, but

the way to release the goods, the way to distribute the goods is certainly within our

grasp and it is in the office Then there is a big challenge of our generation china.

Us

they're not going to become

Allies in 2020

two

but they could certainly find

areas of detente

especially over

climate change and technology and

That could make for a common 22, 20

two supported

by the guardrails of

geopolitics, economics, and finance.

That's

it for this year.

We hosted 28 episodes of COVID time in 2021 covering subjects from fintech to climate change and of course global macro and the pandemic.

What a

fascinating time to cover global markets and economies.

We thank you our listeners for your time and feedback. Thanks to those wonderful

guests who have kindly

given their time and

insights to the show.

Thank you martin Tuckey for your

impeccable production skills,

daisy Sharma and violently thank you for

your tireless support.

We wish you all a happy and healthy holidays and a joyous new year

With your loved ones. See you in 20

22.