2 years ago, through February and March, we were warning of the pandemic risk. A year ago, we began warning of major inflation risk. Both times, we were right. The consensus disagreed, saying “we didn’t know what we were talking about”.
But we did, because the chemical industry is the best leading indicator for the global economy:
- It is one of the largest industries in the world, alongside energy and agriculture
- It has been around for a long time, and its products are used in every country
- Equally important, its products go into an incredibly wide range of applications
- Plastics, textiles, medicines, paints and coatings, agriculture, detergents etc all use chemicals
As a result, the industry has an insider’s view of all the areas shown in the chart:
- It was one of the first to be impacted by the supply chain chaos caused by the pandemic
- Now it is being hit by China’s lockdowns, which will cause further chaos in the next few weeks
- Russia’s invasion has caused energy prices (particularly gas) to rocket, impacting production costs
- This combination has already led to inflation returning to levels not seen for 40 years
- And, of course, OPEC+’s output cuts have taken oil prices to recession levels
This is why we have been warning that recession is inevitable in recent weeks. Once again, of course, we have been told “we don’t know what we are talking about”. Yet last week – to everyone else’s “surprise”, the US reported Q1 GDP fell by 1.4%.
Inevitably, of course, the consensus knew better. Thus CNBC reported:
“This is noise; not signal. The economy is not falling into recession,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics.
FINANCIAL MARKETS ARE TELLING A SIMILAR STORY
The problem extends to the financial sector. Investors now believe that “all news is good news”:
- If companies report good news on earnings and the outlook, then prices rise
- But if they report bad news, prices also rise as this means central banks will print more money
In other words, central banks have destroyed the role of price discovery, which is the key purpose of a market. Instead, they have been operating under the Bernanke Theory that:
“What is good for financial markets, is good for the wider economy”.
So investors don’t need to analyse companies or industries. They just need to ‘buy on the dips’ before more stimulus arrives, and wait for the profits to roll in.
But as the chart showing the legendary Bob Farell’s Rule No 5 reminds us, this euphoria confirms that we have now reached the top of the market.
Central banks and investors believed stimulus programs had created a “New Paradigm” where asset prices would always rise. Now they are starting to realise that stimulus is irrelevant against the 3 Horsemen of the Apocalypse – China’s continuing battle with the pandemic, Russia’s invasion of Ukraine, and the potential for famine as rising gas/fertilizer prices mean farmers can’t afford to grow their crops or feed their animals.