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3 Reasons Why 2022 Will Be Unforgettable

3 Reasons Why 2022 Will Be Unforgettable

Via Birch Gold Group,

After the crazy year we’ve just had, one good question to ponder for a moment is: What does the U.S. economy look like as we head into next year?

To answer that, this article…

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3 Reasons Why 2022 Will Be Unforgettable

Via Birch Gold Group,

After the crazy year we’ve just had, one good question to ponder for a moment is: What does the U.S. economy look like as we head into next year?

To answer that, this article will examine three sectors by looking at economic activity (including Wall Street), the inflation situation, and of course physical gold.

So brace yourself, because if this plays out the way we fear it might, the economic storm on the horizon is less than one week away.

Here we go…

Economists still can’t come to grips with an astronomically overvalued market

It’s amazing how long a virus can be blamed for “Economic Woes.” But that’s exactly how economists summed up 2021:

U.S. economic activity resurged in 2021 after a year marked by lockdowns and stay-in-place orders, with the rebound fueled by a combination of monetary and fiscal stimulus, as well as firm consumer spending.

However, against this backdrop, the second half of this year especially has seen an economy grappling with supply-side constraints and rising price pressures. Lingering virus concerns have compounded with still-elevated demand to push up inflation.

When the government hands out free stimulus money, and also places a moratorium on mortgage payments, it would be natural to expect increased consumer demand for products and services as a result. (Along with a little market mania for good measure.)

But thinking that these pressures and demand would ease early next year, as those same economists surmised, ended up complicated by Omicron jitters.

From the same article:

Goldman Sachs: The emergence of the Omicron variant increases the risks and uncertainty for the economy anticipates GDP will grow 3.8% on a full-year basis in 2022, or down from the 4.2% clip it saw previously.

Bank of America Economist Michelle Meyer: We think 2022 will be one of rebalancing, albeit only gradually… This should take some of the heat off of inflation but not quickly enough.

Wells Fargo: Supply constraints will gradually ease over the course of the next two years.

They’re understandably focused on supply issues, the virus (still or maybe again), and an imminent slowdown in 2022.

A new report from S&P Global calls the supply chain issues “the largest stumbling block for the U.S. economy.” That same report summarizes its economic outlook for 2022 as “cruising at lower altitudes.”

Some of the notable findings include:

  • GDP growth looks to be slow at best through

  • Inflation won’t subside to the Fed’s target rate (2%, in case you’ve forgotten) until late 2023 at best.

  • The potential for a total of six interest rate hikes by 2024.

But perhaps the most interesting thing about all of these forecasts is they appear to ignore the signals from Wall Street. Namely, that the stock market is still grossly overvalued.

Reversion to the mean, the irresistible “financial law of gravity” threatens to bring the market crashing back down to Earth much like it did when the 1999-2001 dot-com bubble burst. That would be a drop of somewhere between 40-60%. Not a “correction,” not a “bear market” – we’re talking “people jumping out of buildings” bad.

Take a look at this chart showing stock valuations now almost as distorted as they were on the eve of the last real crash…

Source

Of course, two other signals are also pointing at an overvalued market like a neon arrow.

The Buffett indicator continues to increase, with its ratio of market value to GDP sitting at 213% (Buffet thinks over 120% is dangerous).

The S&P 500 P/E ratio model is also way outside its healthy range. It currently sits at only 90% above its historical average, dangerously close to dot-com crash territory.

So to summarize, according to the information so far, the U.S. economy can look forward to slow growth, virus anxiety, and an overvalued market (among other things).

Not a good start, and it doesn’t look like inflation worries will be easing in 2022 either…

Sticky inflation grips the nation

“The U.S. may be stuck with higher inflation in 2022, and potentially beyond” is the headline of a forecast at the London School of Economics.

So Powell’s “transitory” inflation idea didn’t really pan out (like we reported it back in June), and now we’re finding out first-hand just how long it can last.

In fact, if either of the LSE’s “less comforting” models for PCE (which doesn’t even count those inconvenient food and energy prices) pan out, there won’t be much improvement through all of 2022 (and possibly beyond):

We examine two other scenarios which are even less comforting. We assume that the size of monthly price increases falls but does not reduce as quickly or as far, so that it reaches twice the pre-pandemic period average next June. In this case, annual PCE inflation would average 3.2 percent in the final quarter of next year.

Finally, if monthly PCE inflation holds at the latest monthly increase (of 0.3 percent) through next year, annual inflation in the fourth quarter of next year would be 3.9 percent.

To put this in perspective, as of October 2021, the PCE is 5.0%. An improvement of only 1.1% throughout an entire year won’t amount to much financial relief for already-wary consumers suffering from record inflation now.

This is also the number that Powell proudly touts as the Fed’s “target inflation” rate of 2%.

The S&P Global report commented on this conundrum: “How sharp a slowdown depends on how big an inflation battle the Fed must fight.”

The battle’s already looking like the end of the movie 300, so it’d be smart to prepare for a razor-sharp slowdown. Prepare for the worst, and hope for the best.

Which brings us to the last bit of our outlook for 2022, how physical gold will fare.

Gold poised for “slow and steady” rally

Just as you might expect, the dire outlook presented thus far increases the investor appetite for physical gold. In fact, that’s exactly what this recent update from the World Gold Council reports:

The shift to riskier and less liquid assets strengthens the case for an allocation to gold, given its unique combination as a highly liquid diversifier that can reduce portfolio volatility.

Popular investments like stocks are starting to get more risky as the market gets more overvalued. Forbes reports that gold’s popularity will rise in 2022 for this reason:

People are getting worried about inflation continuing to rise faster. Investing in gold is an age-old, inflation-protection strategy. The bottom line: History offers good support for investing in gold now.

And the potential for gold prices to rise in 2022 might even be accompanied by higher oil prices:

The United States’ economy is expected to slow down in the first quarter of 2022, causing stock markets to correct and investors to shift their capital out of equity markets and into gold. Financial institutions expect demand to rebound in 2022 and oil prices to return to their rising trend.

(As if 58% higher gas prices wasn’t bad enough…)

As we presented above, the economic slowdown might last a lot longer than just the first quarter of 2022.

If gold’s rally plays out the way we think it will, we’ll see it run much longer than three months.

Slow and steady gold wins the race. Since 2000, gold has been on a steady climb in price. That climb could accelerate once again, much like it did from 2009 to late 2011 in the wake of the housing bubble and subsequent market meltdown.

The bottom line is…

Keep an eye on “alternative investment” opportunities next year

But the potential crash of an overvalued market, stubborn inflation, and physical gold would be three good things to focus on as 2022 starts to take shape.

We’ll have to wait and see how the year plays out, of course. No one has a crystal ball. All too often, predictions have a way of embarrassing those who made them.

Nobody has all the answers. That’s why the most prudent investment strategy is probably not to take sides.

If your retirement savings are well-diversified, and you’re taking an appropriate level of risk, and you’re well stocked with inflation-resistant assets, then perhaps the most useful advice comes from author and salesman Zig Ziglar:

“Expect the best. Prepare for the worst. Capitalize on what comes.”

The entire Birch Gold Group team would like to wish you happy holidays, and a healthy and prosperous 2022.

*  *  *

With global tensions spiking, thousands of Americans are moving their IRA or 401(k) into an IRA backed by physical gold. Now, thanks to a little-known IRS Tax Law, you can too. Learn how with a free info kit on gold from Birch Gold Group. It reveals how physical precious metals can protect your savings, and how to open a Gold IRA. Click here to get your free Info Kit on Gold.

Tyler Durden Tue, 12/28/2021 - 12:30

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Six Commodities Investments to Buy as Putin Wages War on Ukraine

Six commodities investments to buy amid the sustained attack of Ukraine by Russia’s President Vladimir Putin and rising inflation provide potential to…

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Six commodities investments to buy amid the sustained attack of Ukraine by Russia’s President Vladimir Putin and rising inflation provide potential to profit even as the market has been pulling back so far in 2022.

The six commodities investments to buy include those involved in oil, gold and grain due to current supply shortages that are showing no signs of abating anytime soon. Putin’s order for Russian troops to invade Ukraine on Feb. 24 has disrupted the neighboring nation’s agricultural production, led to the theft of grain and imposed an ongoing blockade in the Black Sea to stop farmers from exporting their crops.

Crude oil inventories are down to a “dangerously low point” across Europe, North America and Organisation for Economic Co-operation and Development (OECD) Asia, just as spare production capacity from OPEC+ nations slid to the lowest levels since April 2020, according to BofA Global Research. Inventories of petroleum products also have fallen to “precarious levels” for middle distillates and even gasoline as the market heads into the peak of the U.S. summer driving season, the investment firm added.

As a result, refined petroleum cracks — the differences between crude oil and the prices of the wholesale petroleum products such as gasoline — recently have “spiked to record levels,” contributing to volatility, BofA wrote. In addition, strategic oil barrels held by OECD governments already are low and likely to decline steeply going forward, leaving consumers exposed to future negative supply shocks, BofA predicted.

Pension Fund Chairman Recommends Broad Commodity Funds

Bob Carlson, a pension fund chairman who also leads the Retirement Watch investment newsletter, recommended Cohen & Steers MLP & Energy Opportunity Fund (MLOAX) to all the portfolios in his June 2022 issue. 

Oil and natural gas should be good investments as Europe looks to reduce dependence on Russian exports, Carlson told me. Plus, energy producers in the United States are focused on increasing cash flow and earnings, not maximizing drilling expenses in the short run to increase output, he added.

Bob Carlson, who leads Retirement Watch, meets with Paul Dykewicz.

Good investment opportunities can be found with companies that provide the pipelines, storage facilities and other infrastructure needed to supply the world with oil, natural gas and other energy sources, Carlson continued. 

“One of the attractive qualities of these investments is that their revenues are independent of the prices of the commodities,” Carlson counseled. “The firms charge fees for their services, and the fees often are adjusted for inflation. Their revenues and earnings depend on the volume of commodities passing through their facilities, not the price of the commodity.”

Key energy service companies provide total returns, aided by current income and price appreciation, through investments in energy-related master limited partnerships (MLPs) and securities of industry companies, Carlson pointed out. Those businesses are expected to derive at least 50% of their revenues or operating income from exploration, production, gathering, transportation, processing, storage, refining, distribution or marketing of natural gas, crude oil and other energy resources.

Chart courtesy of www.stockcharts.com

Cohen & Steers Fund Leads List of Six Commodities Investments to Buy

Cohen & Steers MLP & Energy Opportunity Fund recently held 53 positions and had 50% of its portfolio in the 10 largest positions. Top holdings of the fund included Enbridge (NYSE: ENB), Cheniere Energy (NYSEAMERICAN: LNG), Williams Companies (NYSE: WMB), TC Energy (NYSE: TRP) and Energy Transfer (NYSE: ET).

The fund has achieved strong returns since April 2020. Indeed, it has been on an upward trajectory since the second half of December 2021.

“Crucially, oil prices have held up well even in the face of a slowing Chinese economy and widespread lockdowns,” according to BofA. “Given that most China indicators point to a major decline in mobility across the country, any improvement in the COVID-19 situation in large Chinese cities could send oil prices much higher.”

Carlson’s Chooses DBA to Join Six Commodities Investments to Buy

Despite the evils of war, investors still can profit from the rise in grain prices and other commodities through the futures markets, even as many other equities slip. Instead of buying futures directly, investors can purchase diversified agriculture commodities through Invesco DB Agriculture Fund (DBA), Carlson said.

That ETF seeks to track changes in the DBIQ Diversified Agriculture Index Excess Return. The ETF also earns interest income from cash it invests primarily in treasury securities, while holding them as collateral for the futures contracts.

The major holdings in the index are soybeans, wheat, corn, coffee and live cattle. The index is reconstituted each November.

Chart courtesy of www.stockcharts.com

Gold Funds Featured Among Six Commodities Investments to Buy

Carlson also is recommending gold through iShares Gold Trust (IAU). He described it as the “cheapest, most liquid way” to invest in the shiny yellow metal.

Gold has had its ups and downs in the face of rising global inflation, Russia’s invasion of Ukraine, China’s increasing military flyovers of nearby Asian nations and other geopolitical conflicts. At the same time, the U.S. dollar has been appreciating amid high inflation after the Fed recently raised interest rates by 0.5% and promised additional increases later in 2022.

However, there are many risks for the U.S. dollar, so continuing to hold gold remains a good hedge, Carlson counseled.

IAU has retreated since early March, so investors seeking to buy it now that it is rebounding still may do so. Those who believe inflation may stay through 2022 can try to capture gains before the trend no longer is a friend.

Chart courtesy of www.stockcharts.com

Skousen Calls GLD One of the Six Commodities Investments to Buy

“Gold has done far better than stocks, which are down 15-25% this year,” said Mark Skousen, who is recommending SPDR Gold Shares (NYSE Arca: GLD) in his Forecasts & Strategies investment newsletter. 

Mark Skousen, head of Forecasts & Strategies, meets with Paul Dykewicz.

GLD has risen nearly 16% since Skousen recommended it about two years ago. Gold climbed 2021 in anticipation of rising inflation, but its performance has been flat so far this year. If gold truly is an indicator of inflation, the previous yellow metal’s stagnant price may be signaling that price inflation will wane heading into 2023.

The investment objective is for the GLD shares to reflect the performance of the price of gold bullion, after subtracting the trust’s expenses. The trust, formed on November 12, 2004, physically holds gold bars.

The trust’s shares are designed for investors who want a cost-effective and convenient way to invest in gold, according to the company’s prospectus. Skousen, who also leads the Five Star Trader, Home Run Trader, TNT Trader and Fast Money Alert services, recently was a featured speaker at the Vancouver Resource Investment Conference and advised attendees that he recommended gold as a minor holding in every portfolio.

Chart courtesy of www.stockcharts.com

EPD Is Another of the Six Commodities Investments to Buy

Oil has done much better as an inflation hedge than gold, Skousen said. One example is his recommendation of Enterprise Products Partners (EPD, $27, 7% yield), up 27% year to date.

EPD has been the “best performer” in the Forecasts & Strategies investment newsletter so far this year, Skousen said. Enterprise Products Partners is one of the largest publicly traded partnerships and a key North American provider of midstream energy services to producers and consumers of natural gas, natural gas liquids (NGLs), crude oil, refined products and petrochemicals. 

The company’s services include natural gas gathering, treating, processing, transportation and storage. In addition, Enterprise Products Partners provides NGL transportation, fractionation, storage and import and export terminals. It further offers crude oil gathering, transportation, storage and terminals, along with petrochemical and refined products transportation, storage and terminals, as well as a marine transportation business.

I personally have owned Enterprise Products Partners since shortly after the 2020 stock market crash when I bought the stock as it started to recover. The stock has been trending upward since the end of 2021.

Chart courtesy of www.stockcharts.com

Money Manager Picks One of Six Commodities Investments to Buy

A seasoned investment professional told me that she likes farm machinery company Deere (NYSE: DE) to profit from agriculture. Michelle Connell, a former portfolio manager who now serves as president of Dallas-based Portia Capital Management, said she still likes Deere despite its 14% drop after it reported results last week.

Michelle Connell, CEO, Portia Capital Management

Deere’s key issues are supply-related, since demand for agricultural equipment remains strong, especially for the company’s machinery that is more environmentally friendly than its rivals, Connell continued.

Deere is also focused on providing the farming industry with autonomous equipment, Connell counseled. Wall Street analysts expect Deere to have a better story and performance in the second half of 2022 and in full-year 2023.

Connell cited the following to support her recommendation of Deere: 

-More than half its revenues come from large agriculture.

-If the war in Ukraine continues, U.S. farmers will benefit from higher prices for their crops.

-Increased agricultural profits mean that that farmers and farming corporations will be more likely to buy large, expensive farm equipment.  

Deere has fallen back since its recent high on April 20, so investors should be able to purchase shares at reduced prices, Connell continued.

Chart courtesy of www.stockcharts.com

Supply Chains May Improve as China Starts to Lower COVID Curbs

China is easing its COVID-19 restrictions and it could allow goods produced there to start flowing normally again in the coming weeks. China’s lockdowns have affected an estimated 373 million people, including roughly 40% of its gross domestic product (GDP). Disrupted supply chains have affected products such as rice, oil and natural gas.

Shanghai, home to the world’s largest port and 25 million residents, has strained to unload cargo due to strict regulations that have caused shipping containers to stack up. Some Shanghai residents posted videos online to complain about needing food, even though government officials sought to block such public expressions of frustration.

Chinese authorities also drew public criticism for forcibly separating young children with COVID-19 from their parents to prioritize stopping the spread of a new, contagious subvariant of Omicron, BA.2. The variant also has been causing new infections in European nations such as Germany, the Netherlands and Switzerland.

U.S. COVID Deaths Climb Past 1-Million Mark

U.S. COVID-19 deaths crossed the 1-million mark last week and have climbed further to 1,002,726 as of May 24, according to Johns Hopkins University. Cases in the United States, as of that date, hit 83,501,455. America retains the dubious distinction as the country with the highest numbers of COVID-19 deaths and cases.

COVID-19 deaths worldwide totaled 6,280,342 on May 24, according to Johns Hopkins. Cases across the globe have climbed to 526,664,642.

Roughly 77.8% of the U.S. population, or 258,562,059, have obtained at least one dose of a COVID-19 vaccine, as of May 24, the CDC reported. Fully vaccinated people total 221,001,614, or 66.6%, of America’s population, according to the CDC. The United States also has given at least one COVID-19 booster vaccine to 102.9 million people, up about 500,000 in the past week.

New data on so-called “long-haul” COVID patients released on May 24 reported that even though some symptoms improve others may persist, according to the Northwestern Medicine Neuro COVID-19 Clinic. Most of the 52 patients monitored in the Northwestern study reported “brain fog,” numbness or tingling, headache, dizziness, blurred vision and fatigue, even 15 months after initial diagnoses of COVID-19.

The six commodities investments to buy are intended to profit from rising energy, gold and grain prices. Despite the market’s volatility, the highest inflation in 40 years, the Fed’s plan for further interest rate hikes to curb price hikes and increasing federal deficits, investors are finding profitable opportunities in energy, gold and grains.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, Guru Focus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is great as a gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others. Call 202-677-4457 for multiple-book pricing.

 

The post Six Commodities Investments to Buy as Putin Wages War on Ukraine appeared first on Stock Investor.

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Middle East container ports are the most efficient in the world

Middle East container ports are the most efficient in the world
PR Newswire
NEW YORK, May 25, 2022

World Bank and S&P Global Market Intelligence container port performance index shows ports in the Middle East and East Asia responded best to the…

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Middle East container ports are the most efficient in the world

PR Newswire

World Bank and S&P Global Market Intelligence container port performance index shows ports in the Middle East and East Asia responded best to the heavy volume growth and service volatility caused by impacts of the global pandemic

NEW YORK, May 25, 2022 /PRNewswire/ -- Ports in the Middle East took four of the top five spots in the second edition of the global Container Port Performance Index (CPPI) developed by the World Bank and S&P Global Market Intelligence. CPPI is a comparable index of global container port performance intended to serve as a reference point for key stakeholders in the global economy.

Saudi Arabia's King Abdullah Port tops the ranking in 2021, with regional competitors Port Salalah in Oman, Hamad Port in Qatar and Khalifa Port in Abu Dhabi rounding out the top five. Saudi Arabia's Jeddah Islamic Port also featured strongly in eighth place overall.

The ranking is based on time vessels needed to spend in port to complete workloads over the course of 2021, a year that saw unprecedented port congestion and disruption to global supply chains.

"Increasing the use of digital technology and green fuel alternatives are two ways countries can modernize their ports and make maritime supply chains more resilient," said Martin Humphreys, Lead Transport Economist at the World Bank and one of the researchers behind the index. "Inefficient ports represent a significant risk for many developing countries in that they can hinder economic growth, harm employment, and increase costs for importers and exporters. In the Middle East, heavy investments in container port infrastructure and technology are proving to be effective."

The new report also highlights the resilience of East Asian ports and the capacity of Chinese ports in particular to effectively handle challenges brought about by the pandemic.    

Three of the large Chinese gateways, Shanghai (Yangshan), Ningbo and the southern port of Guangzhou, feature in the top 10, while last year's most efficient port – Yokohama in Japan – dropped to 10th place overall.

The index and underlying data are intended to identify gaps and opportunities for improvement that would benefit all key stakeholders in global trade, including governments, shipping lines, port and terminal operators, shippers, logistics companies and consumers. 

Key port performance metrics show large discrepancies in global port efficiency in 2021, with top performers such as King Abdullah Port achieving an average of 97 container moves per hour of vessel port time compared with just 26 container moves per hour at the main ports on North America's West Coast.

More than four-fifths of global merchandise trade by volume are carried by sea, and approximately 35 percent of total volumes and over 60 percent of commercial value is shipped in containers.

"The pandemic highlighted in stark terms the pivotal role port performance plays in the timely supply of goods to countries and their populations. The effects of the pandemic on key global gateways and associated supply chains are very worrying and continue to cause severe supply delays and shortages of goods, leading to higher prices and negatively impacting the financial situation of many companies," said Turloch Mooney, Associate Director, Maritime and Trade at S&P Global Market Intelligence.

In 23rd place, the Port of Virginia is the top ranked port in North America, followed by Miami (29) and Halifax in Canada (46).

The Moroccan port of Tanger-Med, in 6th place, is the highest ranked port in Europe and North Africa. Cartagena in Colombo (12) ranks highest in Latin America and the Caribbean, while Port Matadi in the Democratic Republic of Congo (171) is the best performing port in Sub-Saharan Africa. 

The CPPI is based on total port hours per ship call, defined as the elapsed time between when a ship reaches a port to its departure from the berth having completed its cargo exchange. Greater or lesser workloads are accounted for by examining the underlying data within 10 different call size ranges. Five distinct ship size groups are accounted for in the methodology given the potential for greater fuel and emissions savings on larger vessels.

The full index can be found here.

News Media Contact:          

World Bank

Erin Scronce
Tel: +1 (202) 473 3082
escronce@worldbank.org

S&P Global Market Intelligence

SungHa Park
Tel: +82 2 6001 3128
sungha.park@spglobal.com

About the Container Port Performance Index (CPPI) 

Developed by the World Bank and S&P Global Market Intelligence, the global Container Port Performance Index is a comparable index of global container port performance intended to serve as a reference point for key stakeholders in the global economy, including national governments, port authorities, development agencies, supra-national organizations and private operators of trade, logistics and supply chain services.

About the World Bank (www.worldbank.org/transport) 

The World Bank provides financing, global knowledge, and long-term commitment to help low- and middle-income countries end poverty, achieve sustainable growth, and invest in opportunity for all. We comprise the International Bank for Reconstruction and Development (IBRD), the world's largest development bank, and the International Development Association (IDA), one of the largest sources of funding for the world's poorest countries. With the other World Bank Group institutions as well as partners across the public and private sectors, we are helping build solutions to the global challenges of the 21st century in all major sectors of development.

To harness the full potential of sustainable mobility, the World Bank is helping client countries develop transport infrastructure and services that are safe, green, efficient, and inclusive. The World Bank is the largest provider of development financing for transport globally and places a strong focus on climate-smart transport systems.

About S&P Global Market Intelligence (www.spglobal.com/marketintelligence)

At S&P Global Market Intelligence, we understand the importance of accurate, deep and insightful information. We integrate financial and industry data, research and news into tools that help track performance, generate alpha, identify investment ideas, perform valuations and assess credit risk. Investment professionals, government agencies, corporations and universities around the world use this essential intelligence to make business and financial decisions with conviction. 

S&P Global Market Intelligence is a division of S&P Global (NYSE: SPGI), the world's foremost provider of credit ratings, benchmarks and analytics in the global capital and commodity markets, offering ESG solutions, deep data and insights on critical business factors. S&P Global has been providing essential intelligence that unlocks opportunity, fosters growth and accelerates progress for more than 160 years. For more information, visit www.spglobal.com/marketintelligence

View original content to download multimedia:https://www.prnewswire.com/news-releases/middle-east-container-ports-are-the-most-efficient-in-the-world-301554598.html

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Banks Face Trouble As Credit Cycle Turns

Banks Face Trouble As Credit Cycle Turns

By Simon White, Bloomberg Markets Live Commentator and Analyst

Weak stock markets and worsening…

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Banks Face Trouble As Credit Cycle Turns

By Simon White, Bloomberg Markets Live Commentator and Analyst

Weak stock markets and worsening growth data - today’s miss in the flash PMI is case in point - did not deter Jamie Dimon from making positive comments on credit and the US economy at the WEF summit in Davos yesterday. Banks jumped on his remarks, but they face an increasingly challenging environment as the credit cycle turns and growth slows.

Bank outperformance is more closely linked to longer-term yields than the yield curve, and as a sector it is the most sensitive to changes in yields.

But bonds are already oversold, and as economic data starts to disappoint (today’s disappointing flash PMI is case in point), yields face greater resistance. Moreover, the only seasonally positive months for yields -- January to April -- are now behind us, with yields on average falling in the latter two-thirds of the year.

Everything in macro operates with lags of varying lengths, and the rise in yields has fed into credit through a fall in loan demand and tighter lending conditions.

The credit cycle itself operates in a well-defined sequence: first lending conditions tighten, the loan demand falls, followed by a fall in loan supply. Loan delinquencies then rise as more loans go bad, followed by a rise in charge-off rates as losses are realized. Finally, bankruptcies rise as loan losses lead to insolvencies.

The tightening of lending conditions today is captured by the steady widening of credit spreads, signalling the credit cycle is turning.The rise in charge-off rates typically follows wider credit spreads by six months.

Banks can pre-empt losses by increasing their loan-loss provisions. They did this at the beginning of the pandemic, but they turned out to be way more pessimistic than necessary, given the depth and breadth of fiscal and monetary support given to the economy. However, the loan-loss provisions of US banks are now negative, meaning there is currently zero absorbency for approaching loan losses. Banks were over-prepared in 2020, and they are under-prepared now.

It’s possible of course the growth scare is a storm in a teacup, and that credit spreads will soon tighten again. But that is not the way to bet, with a swathe of leading indicators from manufacturing new orders to heavy truck sales all pointing in the direction of an acceleration in growth’s decline in the coming months.

Inflation won’t help banks either. Elevated and persistent inflation typically leads to the real value of bank assets heading to zero faster than the real value of liabilities. Financials were in the bottom third of performers of sectors and asset classes through the four inflationary regimes experienced since the 1970s.

There are times when the macro stars align, pointing to a great trade set-up, but this is not one of them, despite what a bank CEO may say.

Tyler Durden Tue, 05/24/2022 - 19:25

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