Will the Global Economy Slow Below a Cruising Speed?
September 23, 2021
Read Time 4 MIN
The global economy was like a car hurtling forward at 200 miles per hour at the beginning of the year, driven by the U.S. and China. In our previous investment outlook, we asked the question, “What are the risks to Goldilocks1?” We considered whether the car could slow to 70 miles per hour without putting too much pressure on interest rates, driven by inflation, which would upset the financial markets.
Is the car still speeding or is China, a major driver of global growth, hitting the brakes too hard? We think Chinese policy makers have all the tools, including liquidity moves, to avoid a crash.
We Won’t Know about Inflation until 2022
Inflation was the big question. The financial markets are still debating whether we have an inflation problem or whether global growth may slow too much. We won’t get a good read on this until next summer, but I would say the inflation side of the argument is winning so far. Whether it’s supply chain issues or labor market issues, we’re still talking about these longer than I think the transitory camp would like. Also, let’s be more specific about inflation. Although commodity price inflation matters, our concern with respect to inflation and financial markets is wage inflation, which tends to be longer-lasting and may affect long-term interest rates.
Another surprise that has affected commodity prices is that, as the economy grows and demand for commodity grows, increasing supply has become harder. This is in part due to ESG policies in place, causing “greenflation” and a multi-year trend of price pressure. Finding supply sources like new copper, lithium or gold mines is harder because of, to a certain extent, the environmental impact of these activities. I think this supply issue will continue to underpin commodity prices, and is why I believe that commodity equities are an interesting investment that people should have in their portfolios.
The Fed’s Interest Rate Balloon Looms Large
I think higher interest rates is a potential risk we need to keep an eye on, as it would impact both stock and bond markets. When it comes to rates, it feels like the Fed has inflated this balloon. Bank of America recently released a research note2 that said over half of the S&P 500’s returns in the past decade can be attributed to the Fed’s balance sheet expansion, rather than earnings. The risk is of some bad shock, as seen in March and April of last year, but the Fed keeps pushing more air into the balloon. That’s why I think the markets are so overvalued these days, on a price-to-sales and price-to-earnings basis. It’s really a bet on the Fed. I personally think it’s not a bad idea to keep some money on the sidelines and wait until prices come down a bit.
The 0% interest rates from the Fed has led to overvaluation in the private markets as well as the public markets. While it’s great to see IPOs happening again, companies are coming to market at very rich price-to-sales. For example, Uber is a great business, but the stocks are like zombie stocks—they’re disconnected from the profitability and revenue growth of the underlying company. So after an IPO, the stocks don’t go up although the company’s sales are growing. I think investors have to be aware that it may take several years for the business to catch up with the zombie stock.
From Agriculture Disruption to Crypto’s Financial Disruption
Two themes that we’re currently focusing on are the energy transition and blockchain or crypto. The energy transition is the move away from fossil fuels, which is being driven by a lot of innovation in the private sector. In our resources portfolios, we’re looking for disruptive companies in the sectors that need to be more energy efficient. One is agriculture, which emits about as much CO2 as the energy sector. AgTech businesses are embracing technology to modernize agriculture, leading to higher crop yields, safer crop chemicals and other innovations in food production to provide healthy diets for the world’s growing population.
Cryptocurrencies and the underlying open-source database technology can provide many financial solutions at much lower cost. The fintech revolution that goes hand in hand with crypto is something we find really exciting. There are some over-valued companies, but we think it’s another interesting multi-year trend that investors should consider.
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DISCLOSURES
1 A Goldilocks economy is an economy that is not so hot that it causes inflation and not so cold that it causes a recession.
2 Source: Bloomberg, https://www.bloomberg.com/news/articles/2021-09-08/bofa-s-subramanian-dumps-dire-stock-call-to-catch-up-with-rally
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included herein.
The information herein represents the opinion of the author(s), an employee of the advisor, but not necessarily those of VanEck. The securities/ financial instruments discussed in this material may not be appropriate for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security/financial instrument, or to participate in any trading strategy.
Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. References to specific securities and their issuers or sectors are for illustrative purposes only.
Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.
Investing in cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. There is no assurance that a person who accepts a cryptocurrency as payment today will continue to do so in the future.
Investors should conduct extensive research into the legitimacy of each individual cryptocurrency, including its platform, before investing. The features, functions, characteristics, operation, use and other properties of the specific cryptocurrency may be complex, technical, or difficult to understand or evaluate. The cryptocurrency may be vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the cryptocurrency’s blockchain or other underlying technology. Some cryptocurrency transactions will be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that a transaction may have been initiated.
- Investors must have the financial ability, sophistication and willingness to bear the risks of an investment and a potential total loss of their entire investment in cryptocurrency.
- An investment in cryptocurrency is not suitable or desirable for all investors.
- Cryptocurrency has limited operating history or performance.
- Fees and expenses associated with a cryptocurrency investment may be substantial.
There may be risks posed by the lack of regulation for cryptocurrencies and any future regulatory developments could affect the viability and expansion of the use of cryptocurrencies. Investors should conduct extensive research before investing in cryptocurrencies.
Information provided by Van Eck is not intended to be, nor should it be construed as financial, tax or legal advice. It is not a recommendation to buy or sell an interest in cryptocurrencies.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.
DISCLOSURES
1 A Goldilocks economy is an economy that is not so hot that it causes inflation and not so cold that it causes a recession.
2 Source: Bloomberg, https://www.bloomberg.com/news/articles/2021-09-08/bofa-s-subramanian-dumps-dire-stock-call-to-catch-up-with-rally
Please note that VanEck may offer investments products that invest in the asset class(es) or industries included herein.
The information herein represents the opinion of the author(s), an employee of the advisor, but not necessarily those of VanEck. The securities/ financial instruments discussed in this material may not be appropriate for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security/financial instrument, or to participate in any trading strategy.
Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. References to specific securities and their issuers or sectors are for illustrative purposes only.
Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. The value of cryptocurrency may be derived from the continued willingness of market participants to exchange fiat currency for cryptocurrency, which may result in the potential for permanent and total loss of value of a particular cryptocurrency should the market for that cryptocurrency disappear. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.
Investing in cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing. There is no assurance that a person who accepts a cryptocurrency as payment today will continue to do so in the future.
Investors should conduct extensive research into the legitimacy of each individual cryptocurrency, including its platform, before investing. The features, functions, characteristics, operation, use and other properties of the specific cryptocurrency may be complex, technical, or difficult to understand or evaluate. The cryptocurrency may be vulnerable to attacks on the security, integrity or operation, including attacks using computing power sufficient to overwhelm the normal operation of the cryptocurrency’s blockchain or other underlying technology. Some cryptocurrency transactions will be deemed to be made when recorded on a public ledger, which is not necessarily the date or time that a transaction may have been initiated.
- Investors must have the financial ability, sophistication and willingness to bear the risks of an investment and a potential total loss of their entire investment in cryptocurrency.
- An investment in cryptocurrency is not suitable or desirable for all investors.
- Cryptocurrency has limited operating history or performance.
- Fees and expenses associated with a cryptocurrency investment may be substantial.
There may be risks posed by the lack of regulation for cryptocurrencies and any future regulatory developments could affect the viability and expansion of the use of cryptocurrencies. Investors should conduct extensive research before investing in cryptocurrencies.
Information provided by Van Eck is not intended to be, nor should it be construed as financial, tax or legal advice. It is not a recommendation to buy or sell an interest in cryptocurrencies.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.