Inflation has created a bear market in U.S. stocks.
Inflation this time is a global phenomenon. It’s caused by Russia’s war, China’s lockdown, and the impacts of climate change. The Administration can’t beat it. The Fed can’t beat it. Technology can fight it, the high dollar can offset its impact, and a little belt-tightening won’t go amiss either. But in the end we’re at the mercy of global events.
In a bear market, fear replaces greed. There is fear this morning that the Ukraine war will drag on and force concessions. There is fear that China will invade Taiwan.
I believe the fear is misplaced. American aid should let Ukraine go on the offensive next month. I don’t think China will invade Taiwan.
I believe the saber-rattling there is for domestic consumption. It’s meant to distract from the damage being done to living standards by falling markets, and a struggling economy. Since 1978, China’s leaders and its people have had a deal – rising living standards in exchange for political liberty. Xi Jinping is breaking the promise. He needs patriotic fervor to keep the Communist Party in line against more pragmatic voices. He’s due for re-election in October. Taiwan is his Mexican caravan. It’s a distraction.
Biden is going along, playing the bogeyman. Both sides know that invading Taiwan would plunge the whole world into depression, just as the costs of ignoring the climate crisis have become obvious. There will be no winners, either in East Asia or anywhere else. Markets and economies would completely collapse. Without Taiwan’s technology, they wouldn’t come back for 15 years, by which time all our grandchildren will be doomed. Besides, every war in the 21st century has proven that even if you can take territory, you can’t hold it without genocide. Does Xi want to make Mao look minor league?
I don’t think so.
Absent that, I think inflation and recession are now cresting. By August, our economy will have turned in two quarters of negative growth. That’s a recession. But unlike the 1991 recession after the Gulf War, it’s not a recession of choice. America will remain the world’s strongest economy, as well as the arsenal of democracy.
So, what’s on the horizon? Ukraine wins. China re-elects Xi. Things look a lot better this fall. The stock market starts going back up, technology comes roaring back with a renewed focus on cutting costs, and inflation becomes tame as countries look to export again.
I may be wrong. That’s the thing about predicting the future in a crisis. But if I’m way off, and China does invade, we’re all dead anyway. It’s when everyone is down that optimism becomes a superpower.
