There are lots of events happening in global markets which cannot be full explained through conventional wisdom or empirical evidence. In my view, lot of these events are unintended consequences of policy actions, geopolitics and trade conflicts.
For example, there is a massive rally in the global commodity
prices, despite poor demand and growth outlook for next few years at least. The
recovery to pre Covid level may not entirely explain the rise in commodity
prices much beyond the 2019 levels. Popularization of electric mobility etc.
can explain gains in some commodities, but not in steel, coal, crude etc.
The forecasts of a commodity super cycle sound mostly
unconvincing, given (i) worsening demographics of the world; (b) restricted
mobility; (c) seriously impeded purchasing power of people; (d) already
stretched limits and diminishing marginal utility of fiscal and monetary stimulus;
(e) technology evolution focusing on reversal of trends in labor migration; and
(f) diminishing chances of a full-fledged physical war amongst large countries;
etc.
Material changes technologies related to construction,
manufacturing and transportation etc. also leading to material changes in the
demand matrix for various commodities like steel, cement, copper, coal etc.
The outrageous rise in economic inequalities globally also mean
that investment rate in poor countries will continue to decline for next many
years, as the economic power gets more and more concentrated in the hands of
few rich nations.
I therefore feel that the price trends in the global markets are
deeply influenced by the factors other than economics. Even though the defeat
of Donald Trump in US presidential elections has taken the trade conflicts away
from headlines and front pages; the trade war that started few years ago is far
from over. Besides, geopolitics is also playing a large role in global markets.
In past two years, China has been making conscious efforts to
reduce its holdings of US Treasuries and building large reserves of physical
industrial commodities. The global investors appear selling Chinese assets
(leading to massive tech rout in China) and buying other emerging markets, in
line with the global enterprises’ China+1 policy.
The unintended consequences are that world is facing shortages
of rare earths, semi-conductors, and shipping containers and struggling with
the rising prices of commodities. China which had been exporting deflation to
the world for the past 10years has suddenly become exporter of inflation to the
world.
The markets focusing more on US yields and USD cross rates,
might be missing the point that Chinese aggression on commodities can derail
the entire AI led Tech revolution for at least 4-5yrs, if it continues to choke
supply of rare earths and semi-conductors. This derailment of global trade and
therefore growth is a bigger worry than inflation at this point in time.
It is pertinent to note in this context that today China is
hosting its annual gathering of National People’s Congress, its biggest
political meeting, to approve the plan to propel Chinese economy to the top of
the world, ahead of US. At the center of the new plan will be Beijing’s push to
develop new technologies and cut the nation’s reliance on geopolitical rivals
such as the U.S. for components like microchips. As per some experts, that
should mean allocating more resources to science and technology, with spending
on research and development targeted at around 3.5% of GDP over the period
Another case in point is the sharp rise in the price of sugar in
global markets. This rise has occurred despite the higher than expected
production in India and over 10.6MT carry over stock. But for MSP of Rs31/kg
mandated by the government, the glut should have resulted in domestic prices
falling to much below the cost of production. Also, but for export limitations
and logistic constraints, Indian supplies could bring down the global prices to
much lower levels. Visualizing this as signs of impending global food inflation
cycle may not be appropriate.
The semi-conductor shortages are hurting manufacturing of white
goods, electronic items and automobile, etc. This could have meaningful second
round impact on other sectors of economy. Thankfully, the border conflicts and
political rhetoric have not impacted the Indo-China trade materially. But India
gaining advantage at the expense of China due to China+1 policy could have some
repercussions in the short to medium term. The capacity building in India needs
to take place now. A delay of even one year could potentially render much of
this capacity redundant as global enterprises find alternatives or reconcile
with China.
The short point is that US bond yields and USD exchange rate,
etc. are least of the worries for our markets and economy, presently. Laying
too much focus on these may only distract us from bigger threats and even
bigger opportunities.
