• China enforces strict lockdowns to stop Covid-19
• Shuttered Chinese industry will cause shortages and raise inflation
• Snarled Chinese ports will also drive inflation higher

China Shuts Down to Stop Covid-19

The economic crisis caused by the pandemic is returning to where it all began. Beijing is prioritizing control of the pandemic above all, including the fate of the global economy. The Chinese government is taking drastic measures to stop the spread of COVID-19. They have implemented a zero COVID policy. As of April 19, more than half of China’s biggest cities were under some form of lockdown. Two and a half weeks after extending a partial lockdown into a shutdown of the entire city, Shanghai shows few signs of easing its COVID-19 controls.

The economic damage caused by the massive lockdowns is not confined to China itself. Experts say China’s lockdowns will make inflation and the supply chain nightmare even worse.

China accounts for about 12% of global trade and 18% of all U.S. imports. And for computers and electronics, that number rises to 35%. Covid restrictions have idled factories and warehouses, slowed truck deliveries and exacerbated container logjams. U.S. and European ports are already snarled. The $22 trillion trade in global goods is facing months of severe disruption.¹

Covid Lockdown Effects on the Global Economy

Companies are beginning to panic. “The downstream impact is coming, and it’ll be heavy.” John Bree, the chief risk officer at Supply Wisdom, said. “The latest China lockdowns combined with the Russia-Ukraine war is too heavy a burden. The global chaos is going to further exacerbate disruption and take inflation to a new level.”²

Bank of America analysts said that it’s “another adverse supply shock for the global economy.” And that it will weaken growth and extend the period of high inflation.³

A top Huawei executive said, “If Shanghai cannot resume production by May, all of the tech and industrial players who have supply chains in the area will come to a complete halt. Especially the automotive industry. That will pose severe consequences and massive losses for the whole industry. This will result in supply shortages of some consumer goods in the U.S. in the coming months. Notably electronics, home appliances, and clothing will be affected.”⁴

Shipping congestion at Chinese ports also threatens to derail a global recovery already hurt by inflation. Shanghai, home to the world’s largest container port, has remained shuttered since March 28. One in five container ships is now stuck at ports worldwide. 30% of the backlog is coming from China. Problems at ports mean rising costs for companies. And in turn, increasing inflation for U.S. consumers.

Even if strict lockdowns in Shanghai are lifted, U.S. ports will likely be slammed with a wave of pent-up cargo from newly reopened factories in China. That will lead to higher freight rates. It will worsen congestion at ports worldwide. The costs of which, again, get passed onto the consumer. It will likely take at least a year for the logjams to unsnarl and return to normal.

The long-term effect of this chaos could be the end of globalization as we know it. Supply chains are so interconnected and fragile that a single issue in one place will affect consumers around the globe. Bringing supply chains closer to home has now become a business necessity.

There is one positive result from all of this. The price of oil has gone down. The commodity dropped as the market anticipates less demand from a locked down China.

The return of Covid in China seems to be restarting an awful cycle. The global economy is always hanging on the cusp of normalizing, but never getting there. Now is the time to put your money in a safe asset that can weather this storm. Contact AHG about opening a Gold IRA today.

Notes:
1. https://www.bloomberg.com/news/features/2022-04-25/china-s-covid-crisis-threatens-global-supply-chain-chaos-for-summer-2022
2. https://fortune.com/2022/04/23/china-lockdowns-inflation-supply-chain-nightmare-shanghai/
3. https://fortune.com/2022/04/23/china-lockdowns-inflation-supply-chain-nightmare-shanghai/
4. https://time.com/6168543/china-zero-covid-shanghai-lockdown-economy-impact

• The IMF and the Brookings Institute reported a high probability of global stagflation
• Soaring inflation and stagnant growth will continue due to war and pandemic
• Precious metals are set to climb in face of global risks

IMF Report Points to Stagflation

The global economy is racing down the road towards stagflation according to two reports released this week. Both the International Monetary Fund (IMF) and the Brookings Institute detailed how current world conditions point to higher inflation and slower economic growth.

Simply put, stagflation is when a stagnant economy couples with double-digit inflation. Stagflation occurred in the mid-’70s. It was caused by two oil crises that triggered recessions. The economic ‘maliase’ lasted into the 80s.

Stagflation has often been described as the worst thing that can happen to an economy outside of a war, a natural disaster, or a pandemic. If GDP doesn’t grow enough for wages to keep pace with inflation, everyone feels the pinch. Purchasing power declines, people lose their jobs, credit and investment dry up, and poverty increases.

The International Monetary Fund slashed global growth and revised inflation upward in its World Economic Outlook released Tuesday. The IMF sees inflation soaring to 5.7 percent in advanced economies and 8.7 percent in emerging and developing economies. They lowered their prediction for global growth to 3.6% this year, down from 6.3% in 2021.¹

The IMF blames the negative impact of the Ukraine war. They also account for new supply-chain disruptions from China due to its strict Covid-19 measures.

The IMF numbers are being conservative. They are based on a few assumptions. One is that the war remains limited to Ukraine. Another is that further sanctions against Russia don’t include oil. And third, that the pandemic abates throughout the year. If any of these assumptions prove false, IMF predictions for inflation and growth can get much worse.

Barely six months ago, IMF chief Kristalina Georgieva dismissed talk of stagflation. Now, she says that the Russian invasion is a “massive setback for the global recovery” from COVID. She admits that “for the first time in many years, inflation has become a clear and present danger.”²

The findings of the IMF are echoed in the Brookings Institute/Financial Times most recent report.

The Brookings Institute Also Predicts Stagflation

TIGER is a global index tracking the global economic recovery. It’s run by the Brookings Institute and the Financial Times. The index warned in its Sunday update that stagflation might affect most economies this year. They also blamed the war in Ukraine for greatly slowing down the global post-pandemic recovery. The composite index shows dramatically slower growth, rampant inflation, and dropping confidence levels. It says that each of the world’s three big economic blocs faces considerable difficulties.

There is a chance that the U.S. could avoid stagflation due to the relative health of its economy. However, that chance doesn’t look good. The Brookings Institute said, “The Fed is at real risk of losing control of the inflation narrative and could be forced to tighten even more aggressively than it has signaled, raising the risk of a marked slowdown in growth in 2023.”³ Joe Biden knows that stagflation pushed Jimmy Carter out of office. His administration may react by doing what is best for getting reelected, not what is best for the economy.

Precious metals such as gold are set to shine in this current climate. The IMF predicts precious metals will rise by 5.8% in 2022 and by 2.1% in 2023.⁴  Risks to growth, unending inflation, rising geopolitical risks and a fragmenting global economy are pushing investors to safe havens. If you have assets you want to protect from stagflation, contact AHG to learn more about the benefits of a Gold IRA.

Notes:
1. https://www.politico.eu/article/imf-warns-of-inflationary-spiral/
2. https://www.gzeromedia.com/will-stagflation-make-a-comeback
3. https://www.ft.com/content/e2f2c5ab-ab3f-4a2f-b700-be6894fc179d
4. https://capital.com/can-gold-shine-again-in-the-wake-of-the-imf-stagflation-warning

• Two measures of inflation hit record highs in March
• Major banks claim that inflation is at its peak is met with skepticism
• Even if this is peak inflation, expect a long, slow descent to normal

March Data Reveals More Record Setting Inflation

More record-breaking inflation was reported this month. Wholesale prices surged again in March. Strong consumer demand, pandemic-related supply chain snarls and the Ukraine war continued to fuel the highest inflation in decades.

The Producer Price Index is the latest data point showing the price pressure. PPI is considered a forward-looking inflation measure. It tracks prices in the pipeline for goods and services that eventually reach consumers. The PPI hit a new all-time high as it rose 11.2%. It was the biggest jump in prices since the data series began in November 2010.¹

Just yesterday, the Consumer Price Index showed that the cost of consumer goods and services surged by 8.5% year over year. That’s the highest recorded level since 1981. Consumers are paying more for everyday necessities, including groceries, gasoline and cars.²

Swelling inflation has prompted the Federal Reserve to begin aggressively raising interest rates. They aim to lower inflation without causing a recession.

Peak Inflation

Analysts at Bank of America, Morgan Stanley and UBS said Tuesday that they think inflation has hit its peak.

“Barring further severe disruptions, the March release is likely to be the peak in terms of year-over-year rates,” analysts at Deutsche Bank predicted earlier this week.³

The predictions of “peak inflation” could comfort the White House. Democrats face a potential loss of Congress in this year’s elections because of inflation. Voters have consistently told pollsters that price increases are a top concern. They give President Joe Biden low marks for his handling of the economy.

The banks are optimistic for a couple of reasons. They see supply chain snags unwinding as we move past Covid. According to them, lower used car prices are an indicator of this. Another reason is that the Fed is strongly tackling the issue with high interest rates.⁴

Skeptics say we’ve seen this movie before. When inflation started raging last year, both Fed Chair Jerome Powell and Biden played down the phenomenon as “transitory.” That wasn’t the case.

There are serious concerns about inflation lingering. The prices of services are beginning to rise. They are taking the place of goods as the primary driver of price increases.

“We have been at this juncture before where subtle shifts within the data make it appear that the level of inflation has reached its peak for the cycle only to keep marching higher,” Charlie Ripley, senior investment strategist for Allianz Investment Management.⁵

ING Bank stated that US inflation may near its peak, but it will be a long slow descent. This is due to lingering supply chain issues, significant tightness in the labor market and ongoing corporate pricing power. They predict inflation won’t come down to 3% until deep into 2023. At the same time, expect the economy to shrink.⁶

The bank’s peak inflation prediction may be correct. But they also may be hoping for the best, fearing the effects of unchecked inflation. Investors should heed the expression, hope for the best, prepare for the worst. One of the best ways to prepare for lingering inflation is to open a Gold IRA. Contact AHG to learn how you can easily open one today.

Notes:
1. https://www.cnn.com/2022/04/13/economy/producer-price-inflation-march/index.html
2. https://www.cnn.com/2022/04/13/economy/producer-price-inflation-march/index.html
3. https://www.yahoo.com/now/hit-peak-inflation-224715179.html
4. https://www.politico.com/news/2022/04/12/inflation-spiking-consumer-prices-00024707
5. https://www.politico.com/news/2022/04/12/inflation-spiking-consumer-prices-00024707
6. https://think.ing.com/articles/us-inflation-nears-the-peak-but-it-will-be-a-long-slow-descent

• Fed “Doves” express central bank’s aim to stop inflation at any cost
• Survey shows Americans believe inflation is their top concern and a recession is coming
• Inflation fears keep gold in demand despite rising interest rates

Fed “Doves” Commit to Aggressive Rate Hikes to Stop Inflation

Fed Governor Lael Brainard and San Francisco Fed President Mary Daly spoke Tuesday. They stressed the central bank’s commitment to fighting inflation with higher interest rates. “It is of paramount importance to get inflation down,” Brainard said. Raising rates is necessary to ensure that “you’re not worrying about whether prices will be higher, considerably higher tomorrow,” Daly added. She that said inflation running at a 40-year high “is as harmful as not having a job.” She stressed, “we’re not going to let this go forever.”¹

Their comments carried more weight because they are considered the Fed “doves”. Brainard and Daly usually favor low rates. They also prefer less restrictive policies. Their urgency shows how seriously the Fed is taking the threat of inflation.

Brainard also wants to reduce the Fed’s $9 trillion balance sheet at a breakneck pace. The bank’s massive bond-buying program was designed to support the economy during the pandemic. It would be cut as soon as May.²

Major stock market averages closed considerably lower after their announcement.

Inflation is Everyone’s Main Concern

Inflation is costing the average U.S. household an additional $296 per month. Experts expect it to get worse before it gets better.³

A CNBC and Acorns survey showed that 76% of Americans worry inflation will force them to rethink financial choices. People are most concerned about gas prices, housing costs and food costs. In the last year, gas spiked 38%, shelter rose 4.7% and food prices increased 7.9%.

People’s fears are not unfounded. The USDA’s Food Prices Outlook for 2022 March report said that all food prices are predicted to increase. They expect a 5% rise in food prices this year alone. And that’s on top of all the other increases consumers faced over the past several months.

The survey also showed that Americans are unhappy with the White House. 61% of people surveyed disapprove of how President Joe Biden is handling inflation.⁴

Americans are also very concerned about an economic recession. 81% of respondents believe one is likely to happen this year. They aren’t alone. Deutsche Bank on Tuesday became one of the first big banks to predict a U.S. recession. “We no longer see the Fed achieving a soft landing. Instead, we anticipate that a more aggressive tightening of monetary policy will push the economy into a recession,” the Deutsche Bank economists. Other analysts currently predict a 30% chance of recession. ⁵

Gold Stays Strong

Gold prices steadied on Wednesday. Concerns over high inflation offset fears of aggressive interest rate hikes.

Meanwhile, rising inflation and safe-haven demand resulted in extraordinary sales of physical gold in March. The U.S. Mint saw its strongest gold bullion demand in 23 years. They reported that sales of American Eagle Gold bullion coins were up 73% from last month.⁶

The Fed is determined to stop inflation at any cost. However, their actions may cause extensive collateral damage to the economy. People who are interested in protecting their retirement funds should act before the Fed’s plans are in full effect. Contact AHG about a Gold IRA today.

Notes:
1. https://www.cnbc.com/2022/04/05/-key-people-from-the-fed-just-spooked-the-markets-heres-what-they-said.html
2. https://www.cnbc.com/2022/04/05/-key-people-from-the-fed-just-spooked-the-markets-heres-what-they-said.html
3. https://www.cnbc.com/2022/04/05/inflation-fears-force-americans-to-rethink-financial-choices.html
4. https://www.cnbc.com/2022/04/05/inflation-fears-force-americans-to-rethink-financial-choices.html
5. https://thehill.com/news/3260164-deutsche-bank-predicts-2023-recession-for-us/
6. https://www.kitco.com/news/2022-04-04/U-S-Mint-sees-strongest-gold-bullion-demand-in-23-years-sells-426k-ounces-in-Q1.html

• The Fed is aggressively raising interest rates to fight skyrocketing inflation
• Experts fear the increases will trigger a recession and stagflation
• Economic signs warning of recession are flashing

Runaway Inflation Leads to Aggressive Rate Hikes

Economists had once hoped inflation would cool off by this summer. Then Russia invaded Ukraine. Now, the economic outlook has darkened. Prices for gasoline, food, and other raw materials continue to rise.

The economy’s lingering struggles caught the Federal Reserve by surprise. In response, they decided to pursue aggressive interest rate hikes to curb inflation. Experts now fear the rapid increases could stall the economy and bring on a recession.

The Biden administration is giving the Fed a lot of leeway. They know there isn’t much else they can do. Some Democrats worry about killing growth in the middle of a midterm election year. But inflation is even worse for them politically. Recent polls show that price spikes are by far the top concern among voters. ¹

Experts Warn of Recession

Fed Chairman Jerome Powell said that they can tame inflation without collapsing the economy. He cited 1965, 1984 and 1994 as examples. However, history points to a recession. Since 1961, the central bank has raised interest rates to tame inflation nine times. Eight of those times resulted in a recession. ²

Larry Summers, the former US Treasury Secretary, accused the Fed of “wishful and delusional thinking.” He finds “absurdity” in the central bank’s forecast for inflation to rapidly cool off in a red-hot jobs market.

Summers previously warned that Fed policy put the US economy on a path towards stagflation. Stagflation is the toxic mix of weak growth and high inflation. It plagued the US economy in the late 1970s and early 1980s.³

Moody’s Analytics chief economist Mark Zandi said stagflation is a “low-probability” event. He said the Fed would do whatever it took to avoid it. This includes stopping inflation by crashing the economy. “If it looks like we’re going into stagflation,” Zandi said, “the Fed will push us into recession.”⁴

J.P. Morgan currently puts the odds of recession at roughly 30% to 35%. The historical average is about 15%.⁵

Recession Warning Sign Flashing

Yield curve inversions are when short-term bond yields exceed those of longer-term bonds. The spread between the 5-year and 30-year Treasury yields briefly inverted on Monday. This hasn’t happened since 2006. It flipped on fears that aggressive rate hikes would stunt the economy.

Yield curve inversions are rare. They are viewed as a good recession predictor because they reflect investor fear about the economy’s long-term prospects. Every recession in the past 60 years was preceded by an inverted yield curve. This is according to research from the Federal Reserve Bank of San Francisco.⁶

Preparing for Recession

The underlying economy could be strong enough to handle a few rate hikes. But with a 1 in 3 chance of a recession, it is best to be prepared.

Gold is proven to hold its value as the economy contracts during a recession. During the Great Recession, the Producer Price Index (PPI) for gold rose 2.6 percent in 2008. It increased 12.8 percent in 2009. Overall, between 2008 and 2012, the value of gold increased dramatically. Gold had a 101.1-percent surge in the PPI. It set a then record high of $1,917.90 an ounce in August of 2011.⁷

If you are interested in hedging against the likelihood of a recession, contact a precious metals specialist at AHG about a Gold IRA today.

Notes:
1. https://www.politico.com/news/2022/03/29/federal-reserve-recession-inflation-rates-00021119
2. https://www.cnn.com/2022/03/25/economy/recession-risk/index.html
3. https://www.cnn.com/2022/03/25/economy/recession-risk/index.html
4. https://www.cnn.com/2022/03/25/economy/recession-risk/index.html
5. https://www.cnbc.com/2022/03/28/bond-market-is-flashing-a-warning-sign-that-a-recession-may-be-coming.html?&qsearchterm=recession
6. https://www.foxbusiness.com/economy/recession-warning-flashes-red-yield-curve-inversion
7. https://www.bls.gov/opub/btn/volume-2/pdf/gold-prices-during-and-after-the-great-recession.pdf