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War: Big Inflation & Recession Shocks, Rates Are Smaller

(The Ukraine War) “means a bigger inflation shock, a smaller rates shock, and a bigger recession shock.” -Bank of America Corp. chief strategist Michael…



(The Ukraine War) “means a bigger inflation shock, a smaller rates shock, and a bigger recession shock.” -Bank of America Corp. chief strategist Michael Hartnett, 3-4-22

The war triggers a huge surge in oil prices, consumer sentiment is already falling, and the Fed is likely to raise rates slowly because of the war.  We examine how: economic sanctions can cause inflation during wartime, consumer sentiment declining, real retail sales under pressure, GDP is weakening, and a unique oil price ratio to 10 – 2-year bond spread indicates a coming recession.

Severe Economic Sanctions Against Russia Enacted

After weeks of planning, as the Russian forces massed on the Ukraine border, it became evident to Western leaders that they must act.  During the first few days of the war, the European Union and the U.S. set in motion economic sanctions, including freezing significant oligarch assets in western banks, including Vladimir Putin’s assets, freezing four important Russian bank assets in the west, and cutting off Russian access to the inter-banking SWIFT system.  On March 8th, the U.S. placed an embargo on all Russian oil and gas imports. Plus, Russian planes are prohibited from landing in western airports.   

U.S. oil businesses have also acted with Chevron, BP, and ExxonMobil, ending their partnerships with their Russian partner companies. Apple and Microsoft have announced the freezing of all operations in Russia.  McDonald’s, Starbucks, PepsiCo, and Coca-Cola have suspended product sales and closed thousands of stores. Visa, Mastercard, and American Express have announced suspending transactions in and out of Russia, thus freezing a channel for Russians to move money out of the country.  The ruble has crashed to the lowest value versus the dollar in modern times, and the Russian stock exchange is closed. Next, we examine how major wars cause inflation to surge.

Wars Often Trigger Inflation

Major wars throughout history have caused massive dislocations, recessions, and depressions. These massive infrastructure losses of goods, services, food, water, and fuels trigger scarcity and result in inflation spikes. The following chart, courtesy of The Daily Shot, shows from the War of 1812 through WW II that prices shot up after each war.  The Vietnam War CPI increased from 1.4% in 1965 to 4.3% in 1971 based on a La Salle University analysis of the President’s Economic Report in 1982.  

Sources: Census Bureau, The Daily Shot – 3/4/22

Let’s look at how the allies’ sanctions may impact Western economies and Russia.

Russia is a Major Exporter of Key Commodities Triggering Inflation Surge

Russia is the third-largest oil producer globally and provides 40% of Europe’s natural gas.  The country is the world’s largest exporter of wheat and a significant exporter of fertilizer, gold, silver, palladium, and other rare earth metals.   The shortages already in place from the pandemic set world markets for most commodities at 10-year highs. Commodities are now set to hit all-time records.  The U.S. has announced an embargo on Russian oil, which JP Morgan analysts forecast would jump the price of Brent crude to $150 a barrel for Brent crude quickly.  The all-time high for Brent crude was $147.50 in 2008.  

Commodity prices are surging across global markets as traders seek out new supplies in a cascade of disruptions.  There are over 200 ships stuck at Ukrainian ports, and maritime historians report that more vessels are stranded globally than ever since WWII. The Bloomberg Commodity Index for last week jumped by 12.5%, a high not seen since the 1960s. Next, we look at the U.S. inflation picture. Before the war, inflation was already high in the U.S.  The loss of significant commodity imports added to an already high inflation rate will shock the economy.

Inflation Already at Ten Year High Soars

The U.S. is already experiencing a ten-year inflation high, with the CPI at 7.5% for January and energy is one of the key drivers of inflation. The following chart from the U.S. Bureau of Labor Statistics shows how energy (orange) costs, mainly oil drove the CPI increase.  It seems that shelter costs are underreported in this chart indicated at 7%. Yet, the Case-Shiller Housing Price Index has jumped 19% year over year, and rents have jumped 12% during a similar time frame.

inflation cpi war

Source: Bureau of Labor Statistics – 3/4/22

Recently, commodity prices have soared in the U.S. after the February 24th attacks started.  The following chart from the Chicago Board of Trade shows how metals and grains have surged in the past week.

price of grains and metals

Sources: The Chicago Board of Trade, Factset, The Wall Street Journal – 3/4/22

High inflation continues to hammer consumer sentiment.

Consumer Sentiment Decline Driving Retail Sales Down

Before the Russia – Ukraine War, consumers were already concerned about increasing food, shelter, and car prices as consumer sentiment dropped to a ten-year low. Now, the surge in inflation has been driving sentiment down further.  A Bloomberg Intelligence study shows that a one-cent change in gas prices influences $1.1B in consumer fuel spending.  The following chart from the University of Michigan shows how far consumer sentiment for February has dipped recently to 61.7.

michigan consumer sentiment war

Sources: University of Michigan, Bloomberg – 2/11/22

Consumer sentiment can indicate the direction of retail sales, a significant component of GDP.  The following chart, courtesy of The Daily Shot, shows how retail sales track consumer sentiment over three-month periods.  The sentiment (blue line) has recently fallen below zero, adding to a retail sales decline.

retail sales sentiment

Source: The Daily Shot – 2/14/22

Retail sales have gone up on a nominal basis, but actual spending has dropped when retail sales are adjusted for inflation.  The following analysis by EPB Macro Research uses a 6-month smoothed growth rate of retail sales. The report shows how real retail sales have fallen below zero and sit on the zero line.

real retail sales

Sources: Census Bureau, Bureau of Labor Statistics, EPB Macro Research – 1/31/22

Retail sales include final goods, both durable and non-durable, and consumer services.  Further, consider, consumer spending is about 70% of GDP. Therefore, retail sales are a good indicator of GDP direction.  Forecasts are indicating a weakening GDP for the first quarter of 2022.

GDP 1st Quarter 2022 Forecast Approaches Zero

The Atlanta Federal Reserve GDPNow estimate shows GDP about zero for the 1st quarter of 2022. Its GDPNow model is an estimate based on a computer model with inputs from various reports throughout the month, including Wholesale Trade, Monthly Retail Report, Personal Income and Outlays, Manufacturing ISM Report, Durable Goods Report, Residential Construction, and several others.  The report updates appear about 6 or 7 times a month.  The report data was before the Russia – Ukraine War. 

atlanta fed gdpnow GDP

Source: Atlanta Federal Reserve – 3/1/22

Based on the shock to the U.S. and the world economy from the war, we expect many of the GDPNow model’s components will begin to show weakness besides the already mentioned decline in retail sales.  Finally, a unique analysis of oil prices and 10 – 2 year bond spreads indicates a likely recession.

Oil Price – Bond Model Indicates Likely Recession

As the WTI crude oil price approaches $130 a barrel and beyond, and insightful by Cory Venable of Venable Park Investment. He uses a ratio of oil prices to 10 – 2-year bonds to indicate a possible recession in 6 – 12 months.  The model has a good record of success in forecasting recessions 1990, 2000, 2007, and 2020.  His partner Danielle Park introduces the model to provide you with more detail.  This model uses a WTI oil price at $92 per barrel. Now that oil prices have surged, the model should dive even further, confirming the coming weakness in the economy.

treasury yield curve gdp

Source: Danielle Park – 2/10/22

The uncertainty and new financial order globally are likely to last as Russia pursues its vision of the pre-Soviet Russian Empire.

Putin Not Likely to Shift Views – 30-Yr Economic Order Is Over

Vladimir Putin has set his sights on bringing Ukraine into the Russian orbit of countries. Brookings Institution Russia analyst Fiona Hill observes that Putin sees NATO creeping closer to Russia, so he feels like his country is under siege. He wants to push back while creating a Russian Empire that he believes existed centuries ago. She notes he is adamite about holding to this vision at all costs. The economic sanctions just feed his belief that the West is out to get him.

The proud Ukrainian people have fought the Russian attacks with courage, boldness, and ingenuity.  The outcome is unclear, except that the past 30-year order in Europe is over.  Sanctions between the West and Russia have triggered an economic war sweeping in third-world countries forcing them to choose sides. Further, the U.S. has targeted Chinese companies doing business with Russia in violation of sanctions.  If these firms defy the sanctions, they are threatened with the end of U.S. business sales.

Shifting Economic Flows Means a Recession is In View

We see inflation shock surging due to shortages and dislocations, driving a recession shock.  Despite the problems, the Federal Reserve seems concerned about the slowing economy and will likely only increase rates in small increments. Fed Chairman Jerome Powell announced that the Fed would raise rates slowly. He said a rate of only.25% is planned for their March 16th meeting. Thus, inflation will surge until consumers quit spending and the economy slows.

The war is shifting economic flows of goods, services, and finance into uncharted territory with consequences that are at best uncertain and at worst dangerous. Accordingly, fear, doubt, and uncertainty replace peace, order, and economic integration with Russia. The result of this catastrophic shift in financial relationships will be felt for years to come. 

Patrick Hill is the Editor of The Future Economy, the site hosts analysis of the real economy, ideas on a new economy, indicators, labor-capitalism trends, and posts to start a dialog. He writes from the heart of Silicon Valley, leveraging 20 years of experience as an executive at firms like H.P., Genentech, Verigy, Informatica, and Okta to provide investment and economic insights. Twitter: @PatrickHill1677, email:

The post War: Big Inflation & Recession Shocks, Rates Are Smaller appeared first on RIA.

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Las Vegas Strip faces growing bed bug problem

With huge events including Formula 1, CES, and the Super Bowl looming, the Las Vegas Strip faces an issue that could be a major cause for concern.



Las Vegas beat the covid pandemic.

It wasn't that long ago when the Las Vegas Strip went dark and people questioned whether Caesars Entertainment, MGM Resorts International, Wynn Resorts, and other Strip players would emerge from the crisis intact. 

Related: Las Vegas Strip report shares surprising F1 race news

In the darkest days, the entire Las Vegas Strip was closed down and when it reopened, it was not business as usual. Caesars Entertainment (CZR) - Get Free Report and MGM reopened slowly with all sorts of government-mandated restrictions in place.

The first months of the Strip's comeback featured temperature checks, a lot of plexiglass, gaming tables with limited numbers of players, masks, and social distancing. It was an odd mix of celebration and restraint as people were happy to be in Las Vegas, but the Strip was oddly empty, some casinos remained closed, and gaming floors were sparsely filled. 

When vaccines became available, the Las Vegas Strip benefitted quickly. Business and international travelers were slow to return, but leisure travelers began bringing crowds back to pre-pandemic levels. 

The comeback, however, was very fragile. CES 2022 was supposed to be Las Vegas's return to normal, the first major convention since covid. In reality, surging cases of the covid omicron variant caused most major companies to pull out.

Even with vaccines and covid tests required, an event that was supposed to be close to normal, ended up with 25% of 2020's pre-covid attendance. That CES showed just how quickly public sentiment — not actual danger — can ruin an event in Las Vegas.

Now, with November's Formula 1 Race, CES in January, and the Super Bowl in February all slated for Las Vegas, a rising health crisis threatens all of those events.

The Arena Media Brands, LLC and respective content providers to this website may receive compensation for some links to products and services on this website.

Covid left Las Vegas casinos empty for months.

Image source: Palms Casino

The Las Vegas Strip has a bed bug problem   

While bed bugs may not be as dangerous as covid, Respiratory Syncytial Virus (RSV),  Legionnaires’ disease, and some of the other infectious diseases that the Las Vegas Strip has faced over the past few years, they're still problematic. Bed bugs spread easily and a small infestation can become a large one quickly.

The sores caused by bed bugs are also a social media nightmare for the Las Vegas Strip. If even a few Las Vegas Strip visitors wake up covered in bed bug bites, that could become a viral nightmare for the entire city.

In late-August, reports came out the bed bugs had been at seven Las Vegas hotel, mostly on the Strip over the past two years. The impacted properties includes Caesars Planet Hollywood and Caesars Palace as well as MGM Resort International's (MGM) - Get Free Report MGM Grand, and others including Circus Circus, The Palazzo, Tropicana, and Sahara.

VISIT LAS VEGAS: Are you ready to plan your dream Las Vegas Strip getaway?

"Now, that number is nine with the addition of The Venetian and Park MGM. According to the health department report, a Venetian guest reported seeing the bloodsuckers on July 29 and was moved to another room. An inspection three days later confirmed their presence," reported.

The Park MGM bed bug incident took place on Aug. 14.

Bed bugs remain a Las Vegas Strip problem

Only Tropicana, which is soon going to be demolished, and Sahara, responded to about their bed bug issues. Caesars and MGM have not commented publicly or responded to requests from KLAS or

That makes sense because the resorts do not want news to spread about potential bed bug problems when the actual incidents have so far been minimal. The problem is that unreported bed bug issues can rapidly snowball.

The Environmental Protection Agency (EPA) shares some guidelines on bed bug bites on its website that hint at the depth of the problem facing Las Vegas Strip resorts.

"Regularly wash and heat-dry your bed sheets, blankets, bedspreads and any clothing that touches the floor. This reduces the number of bed bugs. Bed bugs and their eggs can hide in laundry containers/hampers. Remember to clean them when you do the laundry," the agency shared.

Normally, that would not be an issue in Las Vegas as rooms are cleaned daily. Since the covid pandemic, however, some people have opted out of daily cleaning and some resorts have encouraged that.

F1? SUPER BOWL? MARCH MADNESS? Plan a dream Las Vegas getaway.

Not having daily room cleaning in just a few rooms could lead to quick spread.

"Bed bugs spread so easily and so quickly, that the University of Kentucky's entomology department notes that "it often seems that bed bugs arise from nowhere."

"Once bed bugs are introduced, they can crawl from room to room, or floor to floor via cracks and openings in walls, floors and ceilings," warned the University's researchers.  



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Americans are having a tough time repaying pandemic-era loans received with inflated credit scores

Borrowers are realizing the responsibility of new debts too late.



With the economy of the United States at a standstill during the Covid-19 pandemic, the efforts to stimulate the economy brought many opportunities to people who may have not had them otherwise. 

However, the extension of these opportunities to those who took advantage of the times has had its consequences.

Related: American Express reveals record profits, 'robust' spending in Q3 earnings report

Credit Crunch

GLASTONBURY, UNITED KINGDOM - JANUARY 12: In this photo illustration the Visa, Mastercard and American Express logos are seen on credit and debit cards on March 14, 2022 in Somerset, England. Visa, American Express and Mastercard have all announced they are suspending operations in Russia and credit and debit cards issued by Russian banks will no longer work outside of the country. (Photo by Matt Cardy/Getty Images)

Matt Cardy/Getty Images

A report by the Financial Times states that borrowers in the United States that took advantage of lending opportunities during the Covid-19 pandemic are falling behind on actually paying back their debt.

At a time when stimulus checks were handed out and loan repayments were frozen to help those affected by the economic shock of Covid-19, many consumers in the States saw that lenders became more willing to provide consumer credit.

According to a report by credit reporting agency TransUnion, the median consumer credit score jumped 20% to a peak of 676 in the first quarter of 2021, allowing many to finally have “good” credit scores. However, their data also showed that those who took out loans and credit from 2021 to early 2023 are having an hard time managing these debts.

“Consumer finance companies used this opportunity to juice up their growth at a time when funding was ample and consumers’ finances had gotten an artificial boost,” Chief economist of Moody’s Analytics Mark Zandi told FT. “Certainly a lot of lower-income households that got caught up in all of this will feel financial pain.”

Moody’s data shows that new credit cards accounts that were opened in the first quarter of 2023 have a 4% delinquency rate, while the same rate in September 2022 was 4.5%. According to the analysts, these levels were the highest for the same point of the year since 2008.

Additionally, a study by credit scoring company VantageScore found that credit cards issued in March 2022 had higher delinquency rates than cards issued at the same time during the prior four years.

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Credit cards were not the only debts that American consumers took on. As per S&P Global Ratings data, riskier car loans taken on during the height of the pandemic have more repayment problems than in previous years. In 2022, subprime borrowers were becoming delinquent on new cars loans at twice the rate of pre-pandemic levels.

S&P auto loan tracker Amy Martin told FT that lenders during the pandemic were “rather aggressive” in terms of signing new loans.

Bill Moreland of research group BankRegData has warned about these rising delinquencies in the past and had recently estimated that by late 2022, there were hundreds of billions of dollars in what he calls “excess lending based upon artificially inflated credit scores”.

The Government's Role

WASHINGTON, DC - APRIL 29: U.S. President Donald Trump's name appears on the coronavirus economic assistance checks that were sent to citizens across the country April 29, 2020 in Washington, DC. The initial 88 million payments totaling nearly $158 billion were sent by the Treasury Department last week as most of the country remains under stay-at-home orders due to the COVID-19 pandemic. (Photo by Chip Somodevilla/Getty Images)

Chip Somodevilla/Getty Images

Because so many are failing to pay their bills, many are wary that the government assistance may have been a financial double-edged sword; as they were meant to alleviate financial stress during lockdown, while it led some of them to financial difficulty.

The $2.2 trillion Cares Act federal aid package passed in the early stages of the pandemic not only put cash in the American consumer’s pocket, but also protected borrowers from foreclosure, default and in some instances, lenders were barred from reporting late payments to credit bureaus.

Yeshiva University law professor Pam Foohey specializes in consumer bankruptcy and believes that the Cares Act was good policy, however she shifts the blame away from the consumers and borrowers.

“I fault lenders and the market structure for not having a longer-term perspective. That’s not something that the Cares Act should have solved and it still exists and still needs to be addressed.”

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Inflation: raising interest rates was never the right medicine – here’s why central bankers did it anyway

We need to start cutting rates, but there’s something that has to happen first.

Pain, no gain? Bank of England Governor Andrew Bailey. IMF, CC BY-SA

Inflation remains too high in the UK. The annual rate of consumer price inflation to September was 6.7%, the same as a month earlier. This is well below the 11.1% peak reached in October 2022, but the failure of inflation to keep falling indicates it is proving far more stubborn than anticipated.

This may prompt the Bank of England’s Monetary Policy Committee (MPC) to raise the benchmark interest rate yet again when it meets in November, but in my view this would not be entirely justified.

In reality, the rate hikes that began two years ago have not been very helpful in tackling inflation, at least not directly. So what’s the problem and is there a better alternative?

Right policy, wrong inflation

Raising interest rates is the MPC’s main tool for trying to get inflation back to its target rate of 2%. The idea is that this makes it more expensive to borrow money, which should reduce consumer demand for goods and services.

The trouble is that the type of inflation recently witnessed in the UK seems less a problem of excessive demand than because costs have been rising for manufacturers and service providers. It’s known as “cost-push inflation” as opposed to “demand-pull inflation”.

Inflation rates (UK, US, eurozone)

Graph comparing inflation rates of UK, US and eurozone
UK = dark blue; eurozone = turquoise; US = orange. Trading View

Production costs have risen for several reasons. During the COVID-19 pandemic, central banks “created money” through quantitative easing to enable their governments to run large spending deficits to pay for furloughs and other interventions to help citizens through the crisis.

When countries started reopening, it meant people had money in their pockets to buy more goods and services. Yet with China still in lockdown, global supply chains could not keep pace with the resurgent demand so prices went up – most notably oil.

Oil price (Brent crude, US$)

Chart showing price of Brent crude oil
Trading View

Then came the Ukraine war, which further drove up prices of fundamental commodities, such as energy. This made inflation much worse than it would otherwise have been. You can see this reflected in consumer price inflation (CPI): it was just 0.6% in the year to June 2020, then rose to 2.5% in the year to June 2021, reflecting the supply constraints at the end of lockdown. By June 2022, four months after Russia’s invasion of Ukraine, CPI was 9.4%.

The policy problem

This begs the question, why has the Bank of England (BoE) been raising rates if it’s unlikely to be effective? One answer is that other central banks have been raising rates. If the BoE doesn’t mirror rate rises in the US and eurozone, investors in the UK may move their money to these other areas because they’ll get better returns on bonds. This would see the pound depreciating against the US dollar and euro, in turn increasing import prices and aggravating inflation.

Part of the problem has been that the US has arguably faced more of the sort of demand-led inflation against which interest rates are effective. For one thing, the US has been less at the mercy of rising energy prices because it is energy self-sufficient. It also didn’t lock down as uniformly as other major economies during the pandemic, so had a little more space to grow.

At the same time, the US has been more effective at bringing down inflation than the UK, which again suggests it was fighting demand-driven price rises. In other words, the UK and other countries may to some extent have been forced to follow suit with raising interest rates to protect their currencies, not to fight inflation.

What next

How harmful have the rate rises been in the UK? They have not brought about a recession yet, but growth remains very weak. Lots of people are struggling with the cost of living, as well as rent or mortgage costs. Several million people are due to be hit by much higher mortgage rates as their fixed-rate deals end between now and the end of 2024.

UK GDP growth (%)

Chart showing the annual rate of GDP growth
Trading View

If hiking interest rates is not really helping to curb inflation, it makes sense to start moving in the opposite direction before the economic situation gets any worse. To avoid any damage to the pound, the answer is for the leading central banks to coordinate their policies so that they cut rates in lockstep.

Unless and until this happens, there would seem to be no quick fix available. One piece of good news is that the energy price cap for typical domestic consumption was reduced from October 1 from £1,976 to £1,834 a year. That 7% reduction should lead to consumer price inflation coming down significantly towards the end of 2023.

More generally, the Bank of England may simply have to hope that world events move inflation in the desired direction. A key question is going to be whether the wars in Ukraine and Israel/Gaza result in further cost pressures.

Unfortunately there is a precedent for a Middle East conflict leading to a global economic crisis: following the joint assault on Israel by Syria and Egypt in 1973, Israel’s retaliation prompted petroleum cartel OPEC to impose an oil embargo. This led to an almost fourfold increase in the price of crude oil.

Since oil was fundamental to the costs of production, inflation in the UK rose to over 16% in 1974. There followed high unemployment, resulting in an unwelcome combination that economists referred to as stagflation.

These days, global production is in fact less reliant on oil as renewables have become a growing part of the energy mix. Nonetheless, an oil price hike would still drive inflation higher and weaken economic growth. So if the Middle East crisis does spiral, we may be stuck with stubborn, untreatable inflation for even longer.

Robert Gausden does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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