Without Interruption: The 12 Months to Recession

Prices are starting to bite into future business plans, and it is not only in energy. Different countries have increased local interest rates 106 times over the last year. We are almost a year into the emerging countries changing from easing to tightening. The developed world (US, EU etc.) is starting to raise rates now. This trend has already begun slowing down global economic growth, as readers. Readers of our blog are already aware of this.

Input price increase

What is new are the discussions about input price increases stopping production plans. Food providers are in a state of shock, with fertilizer and seed prices having jumped 2-3 times. They are stopping planting corn and shifting into other produce. These decisions come from adding input costs (seed, fertilizer. leases, manpower) to produce a basket of produce, which is then compared with future prices. If it is not profitable, they plant something else. Little of this information is private; as a result, they often move together as a group in their decisions. This will become disruptive to the consumer product companies (such as Frito Lay, Coca Cola and others) that are trying to make production decisions for 2022.

We often go to the grocery store expecting to get whatever’s on our shopping list…at least until recently. Energy and other commodity prices such as corn were not on our concern list. We learned that computer chips can interrupt automotive production in 2021. In 2022, there will be more commodities that create similar disruptions.

Corn is not only on your plate

It is also in your gas tank, as ethanol. It is in your makeup. What is unusual this year, is that as energy prices went up we used our new option of working from home. Gasoline demand is likely to show some unusual seasonal patterns this year. Consumers are likely to protest the high price of gasoline by not driving to the office. This “just say no” choice, impacts other areas as well. Price protests may continue as consumers avoid more purchases than gasoline. It is no different than the impact of Zoom: you do need to buy a shirt, but you don’t need to buy pants. If price pressures hold, we are a sure path to a recession by next year.

Remember, the developed world has only just begun raising interest rates. Please…we cannot say this enough. Raise liquidity now. It doesn’t matter if it is cash or credit lines. Unless the Fed changes their public desires, we are 12 months from a recession.

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