The global economy's 2020 hangover is far from over
It's almost 2022, but 2020 isn't done with us yet.
Despite good news about Covid-19 vaccinations, a solid
economic rebound and seemingly boundless optimism on Wall Street, we're nowhere
near out of the woods.
The global supply chain is a wreck. Europe and Asia are
facing a potentially crippling energy shortage. And the US government's
partisan gridlock over the debt ceiling is far from resolved. All of that has
the global economy in a vise grip that we won't be free of anytime soon.
"There's just as much uncertainty now, today, as there
was in March 2020 as the pandemic was unfolding," said Mike O'Rourke,
chief market strategist at Jones Trading. The only difference, he says, is that
investors now are swimming in easy money that's allowed them to shrug off the
grim headlines.
Supply chain chaos
The Biden administration is doing what it can. On Wednesday,
the White House announced a "90-day sprint" to unclog port
congestion, shifting the Port of Los Angeles to a 24/7 schedule and leaning on
the private sector to expand their overnight operations.
But the government can do only so much. The move to a 24/7
schedule is "low-hanging fruit," said Geoff Freeman, CEO of the
Consumer Brands Association. Ports overseas have been operating that way for
months.
The problem goes much deeper than traffic jams. Truck
drivers, for example, are in high demand just about everywhere. But so are
trucks, which rely on computer chips, which are you guessed it backordered
till the end of time.
The majority of financial executives expect the supply
problems to last well into 2022, if not later, according to a survey released
Thursday by Duke University.
Prices surging
All of this is driving up prices. You don't need a Ph.D in
economics to see that, and yet central bankers and economists are still calling
price hikes "transitory." The Federal Reserve has used the term so
much, and for so long, it's pretty much lost all meaning.
On Wednesday, the official word from the Fed was this:
"The staff continued to expect that this year's rise in inflation would
prove to be transitory." On the same day, the government published data
showing the consumer price index soared 5.4% in September from a year earlier.
The Fed's "transitory" line looks like very
wishful thinking from the people whose job it is to keep inflation around 2%.
As if all of that weren't hard enough on consumers: Winter
is coming, and the world is facing an acute shortage of energy.
American households can expect to spend 54% more for
propane, 43% more for home heating oil, 30% more for natural gas and 6% more
for electric heating, the US Energy Information Administration said Wednesday.
The price spikes are even more dramatic in Europe, where
wholesale electricity prices have increased by 200% compared to the 2019
average, according to the European Commission. Coal prices in China are at
record highs and rolling blackouts to conserve energy have already begun.
And just to keep things interesting, US lawmakers are
flirting with financial disaster.
President Biden on Friday signed a short-term debt ceiling
suspension, averting an imminent default on US debt. But the Treasury says that
deal will only get the country through December 3, setting up yet another
showdown for Republicans and Democrats just in time for the holidays!
It's hard to overstate how devastating a default would be.
Millions of job losses would undo all the gains the labor market has made since
the pandemic hit; credit markets would seize up; paychecks to federal workers,
Medicare benefits, military salaries and other payments would be halted.
"No one would be spared," Maya MacGuineas,
president of the Committee for a Responsible Federal Budget, told CNN last
month. "It would be such a self-imposed disaster that we wouldn't recover
from, all at a time when our role in the world is already being
questioned."
Wall Street's blinders
In the face of so much risk, you might wonder why on Earth
Wall Street seems so unbothered. Despite recent volatility, the S&P 500,
the broadest measure of Wall Street, is up more than 18% so far this year.
Investors hate uncertainty, but they love easy money more.
"It's $10 trillion of fiscal and monetary stimulus
pumped into a $22 trillion economy," said O'Rourke, the Jones Trading
analyst. All of that cash has neutralized the signals investors might otherwise
receive that trouble is afoot.
"There's much liquidity, and everyone feels good about
it that they're ignoring those headlines, those risks, for the time
being," O'Rourke said. "But it's unlikely they'll ignore them
forever."
That's because the Fed plans to start pumping the brakes on
its easy-money policies, most likely next month.
Fear of missing out is another powerful sentiment keeping
stock markets humming. Investors are well aware the party can't last forever,
so they're going wild while they can.
We're in a "massive equity bubble," according to
O'Rourke. And it's difficult, if not impossible, to predict what the breaking
point will be.
CNN Enterprise’ Matt Egan and Paul R. La Monica contributed reporting.
This Article appeared on CNN
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