Deglobalization has been accelerated by Covid and exacerbated further by rising geopolitical tensions. This dynamic, which threatens the hegemony of the $, will usher in an era of building multiple / duplicative / repetitive supply chains and the prioritization of resource/commodity procurement at any price by governments focusing on their domestic citizens over global affairs. Governments, particularly those with deteriorating polling data, will prioritize access to resources, especially energy and food, over other agendas. Manufacturers from across the world are showing continued desire toward reshoring production at home, acquiring inputs from domestic suppliers or producing more parts in house. Rising transportation costs are helping to accelerate the shift away from global value chains as well with container and shipping costs rising massively during the pandemic and remaining sticky on the high side even as the worse congestion shortages have started to ease. With rising wage costs abroad in previously low wage cost countries, the advantages of offshoring manufacturing as being whittled away at the same time the realization that onshoring production reduces a country’s vulnerability to global supply shocks is becoming more apparent. These deglobalization dynamics will be a significant inflationary headwind to offset the structural deflationary tailwinds of demographics and technology that we have had for 40+ years.
This environment challenges the conventional thinking of developed market central banks who are stuck in an old world order type of thinking. Sticky inflation and pricing of commodities in multiple currencies will create an FX world that trades on balance of payments & current account dynamics, resulting in less need for many countries to hold as many US$ and UST reserves as in the past. The Fed is faced with a very difficult choice: start getting serious about raising interest rates to stymie inflation and protect the $ but run the risk that they tighten us into a recession that kicks off a US govt debt crisis as tax receipts dry up or do little now to stop inflation and see the US$ continue to come under pressure anyway with potential for runaway inflation coming but ultimately improve the US competitive position to create its new domestic supply chain. We are not sure they know which way to go but they need to decide soon. The clock is ticking as Putin’s aggressions are accelerating all global time lines, rapidly moving the world to address a new world order that he has desired for decades.
World peace is a thing of the past now. Countries like Germany and Japan have announced desires to re-arm themselves. Other countries will feel similar needs to acquire resources to protect their domestic interests. And at the same time, countries are all becoming more internal, looking to protect their own citizens over trying to help others, particularly in providing basic goods. Russia has weaponized its energy resources as a way to help its domestic agenda. China has weaponized the speed of the supply chain in an effort to help its own agenda. The ball is now in the Biden Administration’s and the Fed’s court ahead of Biden’s SOTU address tonight and Powell speaking tomorrow and into the March Fed meeting in two weeks. They need to decide: Is the US govt and Fed ready to give up the hegemonic state and exorbitant privilege the US has been afforded for decades? Or will they seek to defend the $ and democracy? The next few weeks are likely to determine how things go for the next several decades. We are watching carefully.
We are long gold, gold/silver miners, agriculture commodities and bitcoin and short equity indices while the Fed remains woefully behind the curve addressing these more structural inflationary forces that are continuing to embed themselves into the public psyche.
https://3circleinvestments.substack.com/p/its-the-supply-chain-stupid?s=r