Gross domestic product grew at an annual rate of 7.0% in 2021’s fourth quarter, according to the second estimate released by the Bureau of Economic Analysis.  The update reflects upward revisions to nonresidential fixed investment, state and local government spending, and residential fixed investment.

Total nonfarm payroll employment rose by 678,000 in February as the unemployment rate dropped to 3.8%, the U.S. Bureau of Labor Statistics noted in an unexpectedly strong report. Job growth continued in leisure and hospitality and in professional and business services, while surging in health care and construction.

Initial jobless claims for the week ending February 26 came to 215,000, an 18,000 week-over-week decrease. The less volatile four-week moving average was 230,500, a 6,000 decrease from the previous week's number.

The rising Consumer Price Index for All Urban Consumers accelerated in February, increasing another 0.8% on a seasonally adjusted basis, the Labor Department reported. Over the last 12 months, the all-items index also increased 7.9% before seasonal adjustment, the highest rate of increase since the 1980s.

The benchmark 10-year Treasury yield ended January at 1.839%, having started the month at 1.782%.

The S&P 500 continued its weak start to 2022 with a -3.0% February decrease on a total return basis following January’s 5.4% slide. The CBOE VIX “fear gauge” continued its steep rise, up 21.4% to 30.15, compounding January’s 43.3% jump. This suggests that investor confidence in stocks may be diminishing, in large part due to events in Ukraine and Eastern Europe.

Stocks were mostly down worldwide on global tensions. In Europe, London’s FTSE 100, Amsterdam’s Euronext 100, and Frankfurt’s DAX were down -0.1%, -3.8% and -6.5% respectively for February.

Asian markets were little better. Tokyo’s Nikkei 225 and Hong Kong’s Hang Seng declined markedly, falling -1.8% and -5.6%, respectively, for the month. The only good news came out of the +3.0% advance in Shanghai’s SSE Composite.

When armed conflict erupts between an oil-rich nuclear power and its agricultural breadbasket neighbor, you might expect that stock market values would fall even further than they have so far. This is where central bankers play a role.

After weeks of suggesting that the March meeting of the Federal Reserve governors would result in a 50 basis-point increase in interest rate targets, the meeting’s attendees seem to be rushing to microphones to make sure that investors know that an increase of only 25 basis points is still in play.

The reason the Fed Funds rate is increased in the first place is to tap down inflation. But Russia’s invasion of Ukraine is likely to exacerbate inflation. So why the back-pedaling by the Fed?

The answer may be that war affects economic growth as well as inflation, as a recent Financial Times article explains, and central bankers need to find a new fulcrum where these two interests can balance. The Fed has calculated that events in eastern Europe are, if not distracting from inflation, putting it into context. As long as the U.S. doesn’t sink into recession or commit troops to the conflict, Americans might be willing to share the sacrifice of higher prices at the pump and higher inflation overall in order to isolate Russia, which is basically Europe’s filling station.

Oil prices continued to surge as West Texas Intermediate crude increased +18.6% to end February at $95.72 per barrel. Prices have continued to climb on fears of supply disruptions as major exporter Russia finds itself increasingly isolated. At least for now, global markets are still trading in Russian petroleum. Gold, which usually catches an updraft from the winds of war, rose +5.8% to end the month at $1,900.70 per ounce.

Foreign exchange markets managed to remain steady through February, though March might prove to be a different story. The dollar gained +0.1% in Frankfurt and +0.2% in London while dipping -0.1% in Tokyo.

Cryptocurrency reversed course after a couple down months. Bitcoin, at $41,888 at the end of February, was up +8.8%. Some of that gain likely had to do with the perception of crypto, in certain circles, as the “new gold” - a safe haven in uncertain times. Some of it might also have to do with its function as a way of moving money across borders without accessing SWIFT, the legacy interbank communications system to which Russia is no longer a party.

Other things to worry about

By now, we’re all well aware how much our European allies depend on Russia for oil and gas. So, when Russia went rogue, the price of oil predictably shot up. Based on the fear of supply disruption – not actual disruption, just the fear of it – the price of gasoline rose sharply as well. Because the whole supply chain runs on petroleum in some form or another, we’ll all most likely be experiencing price hikes in just about everything soon.

If that worries you – and it should – here are some other thoughts to keep you up at night.

Choke hold

According to prepper outfitter Emergency Essentials, there are four choke points in the world’s supply chain. The odds are that just about any seaborne export is going to have to go through at least one of these gateways:

• Suez Canal. Accounts for 12% of world trade. A year ago, one container ship got stuck sideways in the canal and it took weeks for crews to pry it loose. That ship ended up costing the global economy $400 million every hour. The ship, called the Ever Given, was carrying goods ranging from semiconductors, which were already in short supply at the time, to garden gnomes, which saw an otherwise unaccountable price spike.
• Strait of Hormuz. Before petroleum products from Iran, Iraq, Saudi Arabia, Kuwait, Qatar and the United Arab Emirates can arrive at their destination, they have to pass through this waterway connecting the Persian Gulf with the Gulf of Oman, and then into the open waters of the Indian Ocean. The oil exports from those countries account for almost a quarter of the world’s supply, and fully one-third of its liquified natural gas.
• Strait of Malacca. This channel between Malaysia and Indonesia is the main trade route between China and India, the world’s two most populous nations. Along the way, such factory economies as the Philippines and Vietnam – as well as such developed nations as South Korea, Japan, Taiwan and Singapore – thrive largely because of the cargo moving through the strait.
• Panama Canal. Anything traveling between the Pacific and Atlantic oceans – Korean smart TVs destined for New York consumers, for example – moves through this conduit.

Of these passages, only the Panama Canal traverses a relatively stable political climate. Any of the others could be shut down due to conflict or insurrection at virtually any time.

Cornered commodities

Sometimes when someone tries to corner the market on a commodity – silver or copper, to cite a couple recent examples – it makes the news.  Arrests are made. Congressional hearings are held. In other, more normal times, especially concerning agricultural products, nobody seems to notice.

This is why four companies control 84% of the beef on supermarket shelves throughout the world –  ­JBS USA and National Beef Packing Co. in Brazil, and Tyson Foods and Cargill in the U.S. Also of note,  two companies – DuPont and Monsanto – sell 71% of the world’s corn seed.

You can find similar stories of oligopolies in hogs, poultry, soybeans and virtually any other agricultural commodity. And it’s the prices for these products that, with the notable exception of gas, are the most visible to the average consumer.

National treasures

Every country on earth has its own set of natural and/or production resources, putting it at a competitive advantage versus other countries. Here’s a list of countries and their commodities that, for many, cause a good deal of concern:

1. Australia mines more than one-third of the world’s iron ore.
2. Brazil and Vietnam account for around 40% of the world’s coffee.
3. Chile and Peru mine half the world’s copper.
4. China produces more than half the world’s flax, which is refined into linens.
5. China catches or farms more fish than the next 14 countries combined.
6. China plus semi-autonomous Hong Kong produces almost half the world’s integrated circuits.

You might be detecting a pattern if you spot China’s increasing dominance in world trade. Let’s not forget that this is the same China that is at least half-heartedly backing Russia’s play in Ukraine. If Russia succeeds, it may embolden China to reassert its claim to Taiwan.

If worse comes to worst and the U.S. has to back Taiwan, its longtime democratic ally in the Asia-Pacific region, that could affect Americans’ access to copper, linen, fish, computer chips, and so much else.

Suffice it to say, there’s a lot going on in the world, and a lot of it isn’t good news for investors. Be sure you’re staying on top of things or working with a trusted financial advisor who is and will continue doing so on your behalf.

-Weston

Weston Pollock

Managing Partner

Weston Pollock is a Managing Partner at Smith Anglin Financial, and leads the firm’s marketing and business development. He regularly meets with prospective clients, counsels existing clients, participates in investment portfolio analysis and develops materials for communicating with the firm’s clientele and target markets. He holds a BBA in Finance and Real Estate and numerous securities licenses and designations.