Finance Monthly - February 2022

19 Finance Monthly. Inve s tmen t modern necessities like Netflix will dramatically hit discretionary spending. Wages are likely to remain sticky for most workers, unless they are prepared to move into the more challenging sectors like service, entertainment and logistics where wages are rising. Issues like consumer exposure to interest-free debt (like Klarna) could prove “interesting” – if discretionary spending falls, then so will the amount of consumer free-cash to service debt. Inflation Forget transitory – that’s a 2021 expression. Supply chain bottlenecks triggered inflation – but they have themselves spawned significant consequences. We’re now seeing higher wages and supply chains evolving. Energy prices will hoick inflation. While 6-7% inflation rates will characterise the early part of the year we may see moderation to 4% later – but that will be remained sustained as the economy adjusts and finds a new equilibrium at a higher permanent inflation rate. Bonds The market now expects the Fed could hike four times this year. The Bank of England has already hit the button. Rising rates mean a bad year for bonds – but remember they are also the ultimate safe haven if markets snap. We’re likely to see an acceleration of corporate defaults which have been artificially low for over a decade due to ultra-low rates allowing unfit companies to survive – and that could get very messy due to terminally dismal liquidity in bond markets – which will set like concrete when the selling starts. Corporate spreads will widen – and the markets will have to relearn the fundamentals of credit strength. Crypto vs Gold No contest. Gold will win. Crypto enthusiasts can argue gold is as destructive to the environment as Bitcoin. Really. But it’s also real. Bitcoin isn’t. Energy 2021 demonstrated the dangers of Energy Sovereignty. Without it, nations are vulnerable – as Europe is finding out. Ensuring sufficient stocks of energy – particularly oil and gas – will become paramount. ESG concerns will be dismissed as it becomes clear the optimal routes to Net Carbon Neutrality by 2050 depend on a phased approach with gas replacing coal before gas can be replaced itself. The likelihood is for oil and gas prices to remain elevated through 2022. Renewables Will 2022 be the year the world wakes up to the fact wind and solar might be marvellous in terms of fooling the people we’re greening the planet? They are the least efficient source of power, more expensive than expected to maintain, but can achieve easy funding at tight levels because every institutional investor wants to show off how green and ESG compliant they are by holding renewable assets. A better route to zero carbon involves a much wider range of non-CO2 emitting, but more “difficult” energy sources such as tidal, nuclear and clean gas, and mitigants like reforestation and better waste carbon sequestration. These are all achievable – but difficult. Nuclear fusion – will remain a tomorrow solution. I haven’t mentioned hydrogen – because it’s far more difficult than folk expect. EVs A world where Rivian made 1400 cars in 2021 but is worth more than the German auto sector has never made much sense. It makes even less when we appreciate that every single EV on the planet today is based on lithium batteries. Lithium is a nasty, dirty dangerous element that will kill us all if it leaks into the water table. Whatever Elon Musk says, it is very difficult to recycle. If we are going to make 35 million EVs by 2030, then we either mine every single atom of it on the planet or hope that a friendly asteroid comprising pristine lithium and cobalt makes a soft landing (as it didn’t happen in the film “Don’t Look Up”). Otherwise – we probably need a rethink on EV power – soon! “Crypto enthusiasts can argue gold is as destructive to the environment as Bitcoin. Really. But it’s also real. Bitcoin isn’t.”

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