by Louis Navellier
March 22, 2022
The U.S. held a long (seven-hour) meeting with representatives in China on Monday in Rome and warned China not to provide Russia with any military equipment. U.S. National Security Advisor Jake Sullivan stated on CNN’s “State of the Union” that “we have communicated to Beijing that we will not stand by and allow any country to compensate Russia for its losses from economic sanctions.”
China is very pragmatic, and so I believe China will likely advise Russia to accept a ceasefire to diffuse the international outrage over their Ukrainian invasion. In the meantime, Zhao Lijian, a spokesperson for the Chinese government “saved face” by saying, “Recently, the U.S. has been spreading false information against China on the Ukraine issue, with sinister intentions.” Russia’s top diplomat, Sergei Lavrov, admitted on Wednesday that there was “hope for reaching a compromise” after Russian troop movements stalled and made “limited to no progress” according to the U.S., due to fierce Ukrainian resistance.
Leaders of the Czech Republic, Poland, and Slovenia visited Ukrainian President Volodymyr Zelensky in Kyiv in a sign of unity. Then Zelensky gave inspirational addresses to Canada’s Parliament on Tuesday and the U.S. Congress on Wednesday. During his Canadian Parliament address, Zelensky said, “All wars end in agreements [and] the positions in the negotiations sound more realistic.” Before the U.S. Congress, Zelensky played a powerful video of the death and destruction in Ukraine with a request for U.S. help.
Russia’s President Vladimir Putin is obviously becoming very frustrated with recent Ukrainian military victories, such as a Ukrainian special forces unit that rescued Melitopol Mayor Ivan Fedorov after he was “hooded” and taken away by Russian special forces. Under increasing criticism within Russia, Putin stubbornly warned that he would cleanse the “scum and traitors” that he accused of working covertly for the U.S. and its allies. Putin added that “I am convinced that this natural and necessary self-cleansing of society will only strengthen our country, our solidarity, cohesion and readiness to meet any challenge.”
When asked how such a cleansing would operate, Kremlin spokesman Dmitry Peskov on Thursday said people “are disappearing from our lives by themselves,” including by resigning from work positions or leaving Russia. Clearly, the economic collapse of Russia and internal unrest is threatening Putin’s rule.
So, based on new hopes for a peaceful Ukrainian/Russian resolution to their nearly month-long war, the world is cautiously optimistic. The economic sanctions on Russia have been devastating and Russia was facing a $150 billion debt default nightmare last Wednesday, but then Russia found the U.S. dollars on Friday to make the debt payment. Standard & Poor’s has downgraded Russia debt to CC (junk). I should add that although China has been trying to help Russia avoid economic sanctions, China is struggling with its own debt problems from Evergrande, slowing economic growth, and new Covid-19 lockdowns.
Speaking of China’s challenges, the latest supply chain glitch was that China’s Covid-19 cases more than doubled in recent days. The financial and technology hubs of Shanghai and Shenzhen are now restricting the movement of citizens. Approximately 30 million Chinese are now under lockdown orders.
In fact, Foxconn, which is a major Apple supplier, had to shut down its production last week due to Covid-19, which will further delay Apple products. I recently ordered a Mac Studio computer, which is now expected to be delayed due to the Foxconn shutdown. It will be interesting to see how Apple communicates to its customers about why its products are delayed, but I expect it will not hurt Apple’s business too much, since global supply chain glitches merely cause many business backlogs to grow.
Inflation Continues to Soar – Now into Double Digits
The Labor Department announced on Tuesday that the Producer Price Index (PPI) rose 0.8% in February, slightly under the economists’ consensus estimate of a 0.9% increase. The core PPI, excluding food and energy, rose 0.7%. In the past 12 months, the PPI has risen 10%. Wholesale food prices surged 1.9% in February, while wholesale energy prices soared 8.2%! Also notable, transportation and warehousing rose 1.9% in February, which implies that service costs will persist, and the supply chains are still recovering.
Surging natural gas prices are now responsible for higher utility bills from both heating and electricity generation. Obviously, wholesale diesel and gasoline prices are also causing increased prices in a variety of goods and services. When I landed in Reno last week, I noticed that Uber cost three times the price of a cab, so I decided to take a cab. The price of virtually everything requiring transportation is rising.
In the meantime, crude oil prices have been on a slippery slope in the past few days as Europe and many economies slip into recession, which would ironically cause worldwide energy demand to moderate a bit.
Food inflation remains rampant due to the growing shortage of wheat from both Ukraine and Russia, which combined account for about 30% of world wheat production. Furthermore, the high cost of fertilizer, due to high natural gas prices, is continuing to raise the cost of crops and livestock due to higher feed costs. I should add that the companies that are profiting from this wholesale inflation include truckers, food processers, and grocery stores. As a result, many are poised to post record results.
Commodity markets have been wild in March as futures markets for currencies, crude oil, corn, wheat, and many metals markets have been volatile. The market for nickel remains erratic and plunged 5% (limit down) on Wednesday on the London Metal Exchange (LME). Unfortunately, the LME executed some nickel trades below the 5% limit, so trading had to be stopped again. Then, nickel prices declined another 12% towards the end of the week, so nickel remains volatile, and the LME’s reputation has been damaged. Russia is a major nickel producer, and the new, most efficient electric vehicle batteries are now composed of up to 90% nickel, so I expect other EV manufacturers will follow Tesla and raise EV prices.
Other Economic Indicators Reflect “Stagflation” (Slower Growth with Inflation)
Last Wednesday, the Commerce Department announced that retail sales rose just 0.3% in February, which was below economists’ consensus estimate of a 0.4% increase. Naturally, February retail sales represented a dramatic slowdown from January’s revised 4.9% surge. Even then, most of February’s gain was due to rising prices at gas stations. Vehicle sales and auto parts also rose a healthy 0.8% in February.
The Natural Retail Federation on Tuesday forecasted a 6% to 8% rise in 2022, down from 14% in 2021, so essentially retail sales are expected to follow the underlying inflation rate as stagflation persists.
In addition, new vehicle sales ran at a 14.5 million annual pace in February, down from a 15.5 million annual pace in January, but automotive sales prices rose in February, so the value of total sales rose.
The Federal Open Market Committee (FOMC) statement on Wednesday telegraphed potentially six more 0.25% key interest rate hikes – which was not as dovish as I had expected. However, Fed Chairman Jerome Powell’s press conference seemed to reassure investors that the Fed would raise rates gradually.
The yield difference between the 2-year Treasury note and 10-year Treasury bond is getting to be too close for comfort and may cause the Fed to limit further interest rate hikes. Under no circumstance does the Fed want to invert the yield curve, since it would cause undue stress on the banks the Fed regulates.
I should add that the U.S. dollar remains strong against the British pound and euro. If the Fed did raise key interest rates six more times, the U.S. dollar would likely continue to appreciate against our major trading partners. Fed Chairman Powell has already said that if the euro keeps its key interest rates low – especially if the European Union (EU) is confirmed to be in a recession – that will influence the Fed to “go slow” in rate increases. Due to low (near-zero, even below zero) yields in the EU and Japan, this will naturally prohibit the Fed from raising rates too much, otherwise the U.S. could also slip into a recession.
By the way, the Atlanta Fed revised its first-quarter GDP up to an annual pace of 1.3%, up from a 0.5% annual pace previously estimated, so there is no immediate risk that the U.S. will fall into a recession.
The Labor Department on Thursday announced that new weekly unemployment claims came in at 214,000 in the latest week vs. a revised 227,000 in the previous week. Continuing unemployment claims came in at 1.419 million, down from a revised 1.494 million in the previous week. Overall, the fact that unemployment claims continue to fall remains very encouraging.
On Thursday, the Commerce Department announced that existing housing starts rose 6.8% in February to an annual pace of 1.769 million, which was significantly better than the consensus estimate of 1.7 million.
Single-family home starts rose 5.7% in February to an annual pace of 1.22 million, while multi-family home starts rose to a record pace of 554,000 and building permits eased 1.9% to 1.86 billion in February.
On Friday, the National Association of Realtors announced that existing home sales declined 7.2% in February to an annual pace of 6.02 million, as higher mortgage rates are finally impeding home sales. In the past 12 months, existing home sales declined 2.4% as median home prices rose 15% to $357,300.
The other thing impacting the housing market is the confusion regarding the FOMC members’ “dot plot” (projection of rate increases), which is frankly all over the map. St. Louis Fed President James Bullard, who voted against the Fed’s latest 0.25% rate hike (since he wanted a 0.5% hike) has been the most outspoken. On Friday, Bullard called for the FOMC to raise rates the equivalent of 12 times this year to 3%. However, Bullard is an outlier, based on the other members’ dot plots. Nonetheless, such outspoken statements could hinder the housing market if short-term interest rates surged to 3%. (I should add that the Treasury yield curve briefly inverted Friday as two-year yields rose above five-year yields.)
ESG Investing is Performing Badly – While Exposing Some Double Standards
In the investment world, the “Environmental, Social and Governance” (ESG) world is very worried lately, since they are notorious for avoiding stocks with any connection to fossil fuels, even natural gas. As a result, ESG returns are devoid of exposure to the strongest 2022 industry sector (i.e., energy), so their returns relative to benchmarks are plunging. Furthermore, since China dominates the manufacture of solar panels (using Uyghur slave labor force), there are serious social concerns there, too. The electric vehicle (EV) world is also struggling with the nickel that comes from Russia and the cobalt that comes from the Congo, which is all too often mined by children crawling into dangerous 100-foot holes in the ground.
In general, ESG pushed global investing, but when growing prosperity in other countries depends heavily on slavery or child labor or earns international sanctions, ESG seems to have some double standards.
I am originally from Berkeley, California, which led the California natural gas ban on new construction, but expanding natural gas restrictions have hit a wall in virtually all other states and in many countries, like Germany. As a result, ESG is mutating to become more about diversity and pro-labor, since the green ESG push is now imploding and is characterized by poor performance relative to stock market indexes.
Global supply chains remain stressed due to economic sanctions on Russia. Just to demonstrate how complicated supply chains have become, since 2020, Tesla has been procuring its aluminum from Rusal, which is the Russian metals giant founded by sanctioned oligarch Oleg Deripaska. Rusal is the second-largest aluminum supplier in the world and its business with Tesla was expected to expand due to all the aluminum casting parts required by its new Berlin plant. Overall, it will be interesting if Tesla can diversify away from Rusal without jeopardizing its Berlin manufacturing plant.
To close on a little dark humor, Elon Musk has challenged Vladimir Putin to a fight by tweeting “I hereby challenge Vladimir Putin to single combat,” with Ukraine at stake. The Kremlin issued a “weak” response.
Navellier & Associates owns Apple Computer (AAPL), and a few accounts own Tesla (TSLA), per client request in managed accounts. We do not own or China Evergrande Group (EGRNF). Louis Navellier and his family own Apple Computer (AAPL), via a Navellier managed account and Apple Computer (AAPL), in a personal account. He does not own Tesla (TSLA) or China Evergrande Group (EGRNF) personally.