More than a decade ago, the Arab Spring roiled the Middle East from Tunisia to Egypt to Yemen. Massive protests demanding freedom, equality and bread were met with repression and conflict. Could today's growing scarcity of food spark another spring of discontentment?

 

The origins of the name "Spring," whether Arab or otherwise, was a term historians used to describe the Revolutions of 1848, known as the "People's Spring." It was a series of upheavals that swept through Europe at that time. Republican revolts took place first in Sicily, spreading to France, Germany, Italy, and the Austrian Empire. They all ended in failure and repression and were followed by widespread disillusionment among liberals.

 

The movement in the Middle East has had slightly better results, at least temporarily, in places like Libya, Tunisia, and Egypt where regime changes did occur. But for the most part, the same oppression, civil wars and tyranny exists today. Are we ripe for a reoccurrence either within the Arab world or elsewhere?       

 

In the past, I explained how climate change, including the growing scarcity of water, has created a crisis in global food production.  The coronavirus pandemic and the Ukraine war have made an already precarious situation worse. Sickness, supply chain shortages, inflation, and now war have decimated food production in every step of the agricultural process.

 

The farming labor force has been decimated by the coronavirus. Inflation and supply chain issues have forced cutbacks in everything from transportation to agricultural materials and equipment. Fertilizer has skyrocketed in price and supplies of it have become increasingly scarce. A variety of infections from swine to bird flu has assaulted herds and flocks throughout the world, while drought, flooding, and ice storms continue to batter crops worldwide.

 

The United Nations recently released a table that showed that food prices in January 2022 reached their highest level since 2011. The prices of meat, dairy and cereals climbed, while edible oils reached their highest level since tracking began in 1990. Consumers only need to compare prices today for coffee, pasta, butter, all kinds of grains, and protein to know that food prices have catapulted far past those January 2022 price levels.

 

Making a bad situation worse, the fighting in Ukraine and unrest in Russia threatens to reduce the world's availability of important food staples which the two countries export. They account for a large market share of the world's sunflower oil (64 percent), wheat (23 percent), barley (19 percent) and corn (18 percent).

 

Ukraine has already lost $1.5 billion in grain exports since the war began, according to Ukraine's agricultural ministry. Shortages of fuel and fertilizer, Russia's blockade of the Black Sea (Ukraine's main export route), the drain of labor as farmers enlist in the military, and the enemies mining of farmland in the north have conspired to make it all but impossible to farm in certain areas of Ukraine.

 

Planting season starts at the end of April. Ukraine's Agriculture Minister Roman Leshchenko, believes the country's spring crop sowing area may more than halve this year from 2021 levels (of some seven million hectares). If the war continues, and all indications are that it will, even less will be planted. The result appears to be a continued rise in food, fuel, and possible famine. The impact of rising food price increases affects different countries. Until recently, Asia, for example, has been spared the worst in food price rises due to a bumper rice crop. But that may change.

 

China, a nation that needs to feed 1.44 billion people, is facing deepening challenges in its production of rice, soybeans and corn. Exploding prices in fuel, combined with the price rise and scarcity of fertilizer have hamstrung farmers in the Northeast regions. In addition, China's Covid lock down policies have impacted the plowing of fields and sowing seeds. This area produces more than a fifth of China's national grain output. The only alternative is to increase imports, which only compounds the existing worldwide food crisis as demand outstrips supply.

 

The shortfall in expected exports from Ukraine and Russia would primarily impact the Middle East and North Africa as it did back in 2011. Egypt, Libya, and Lebanon import more than two-thirds of these food staples from Ukraine and Russia. Some assume that governments in this region will resort to price controls on food, rather than face the possibility of another Arab Spring. However, most governments are already cash-strapped from fighting the coronavirus pandemic.

 

In Africa, conflicts in Sudan, Nigeria, Ethiopia, and the Democratic Republic of Congo, combined with long-standing drought, the coronavirus, and the high price of oil have disrupted transportation and food production.

 

In Latin America, many people spend as much as 50-60 percent of their income on food. Inflation is higher as is the price for food and fuel. An ongoing wave of violent protests in Peru last week could be a sign of the future. The demonstrations were originally triggered by rising fuel costs, but quickly morphed into large, anti-government demonstrations and highway blockades.

 

Peru President Pedro Castillo was forced to declare a state of emergency, while placing Lima, the capital, under a curfew. Inflation in March 2022 was the highest in 26 years. Prices of food and fuel spiked almost 10 percent since last year. And Peru is not alone. Discontent is spreading. Leaders in Sri Lanka, Afghanistan, and Pakistan, among other developing countries, are facing increasing public pressure over the same issues. My bet is that we see more of the same as the year progresses.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

 

"Quantitative Easing" or QE, may be a more familiar concept to readers, since we have been experiencing some form of QE (monetary stimulus) since the Financial Crisis of 2008. QT is the opposite. The Fed first tried to reduce its balance sheet back in 2018-2019. The stock market had such a hissy fit that the double-digit melt down that ensued convinced the central bankers to back down in their attempt to normalize their balance sheet. By the end of 2018, the Fed was allowing $50 billion/month to run off its balance sheet. Market turbulence erupted almost immediately and by March 8, 2019, the Fed under Jerome Powell, turned the money spigots back on and reversed the easing that "no longer seemed necessary." The crisis was over, and so was QT.

 

The problem, however, is that investors have become accustomed to the low interest rate environment that the Fed engineered through asset purchases and low interest rates. It has become an essential prop holding up equity values, which have climbed higher and higher.

 

Every time the Fed has sought to drain liquidity from the banking system, the stock market has reacted by staging a Taper Tantrum. There was one in 2013, another in 2019 and we are in one now.

 

Fast forward to the coronavirus pandemic when the Federal Reserve Bank bought a massive $3.3 trillion in U.S. Treasuries, and $1.3 trillion in mortgage-backed securities to support the markets. Those Fed purchases have not only contributed to the massive gains in the stock market in 2021, but also contributed to the present explosion in the inflation rate.

 

On April 6, the FOMC minutes of the Fed's March 15-16, 2022, meeting became available. The notes showed deepening concern among members that inflation had broadened throughout the economy. Most policymaker were prepared to raise interest rates in May by 50 basis points and continue these half-percentage-points hikes in coining policy meetings.

 

They also supported a second try at reducing the Fed's holdings of Treasury bonds. Up to $60 billion per month of U.S. Treasury bonds will be sold as well as reducing $35 billion per month in mortgage-backed bond holdings. That is nearly double the Fed's QT program from 2017 to 2019. By reducing the balance sheet, while moving the short-term, Fed funds rate higher in 50-basis-point increments. The Fed is again taking away the punch bowl for equity investors.

 

The news may have shocked most investors, but unfortunately it was part and parcel of why I have remained relatively bearish throughout the year thus far. Will investors double down on dumping equities or will they calmly go to the slaughter ahead?

 

I fear that an even worse sell-off may be ahead of us sometime in May 2022 when the Fed begins implementing QT.  The stock market has been practically straight down most of the week on news of this plan. I advised readers last week that the stock market had become too "frothy" after the bear market rally of last month. I wrote that we could see a pullback to "between 4,400-4,500 level on the S&P500 Index." We have accomplished that, and I am now looking for a relief rally that should continue for a week or two. After that, we face earnings season and the next Fed meeting. Strap in.

Defense stocks have soared since the outset of the Ukraine-Russian conflict. That is a typical reaction to geopolitical strife. Frequently, investors bid up the sector only to sell these stocks once peace returns. This time may be different.

 

Vladimir Putin has put the world, and specifically Europe, on notice that he is bound and determined to resurrect the formal might of the USSR, no matter how long it takes. His actions have caused a sea of change in Europe's decades-long freeze on defense spending. Germany is a prime example of what analysts believe will be the beginning of a new era of inflated European defense budgets.

 

In February 2022, Chancellor Olaf Scholz argued before the German Parliament that the invasion "was a turning point in the continent's history." In order to prepare his country for this new reality, he immediately doubled Germany's defense budget from 47 billion euros to 100 billion. Several European Union (EU) members are planning the same thing. Finland, Sweden, the Netherlands and the UK have been first to declare their intent to beef up defense spending and more countries are expected to follow. The intent is to raise defense spending by NATO members to more than 2 percent of GDP.

 

And while the Ukraine War is serious enough to goose spending for planes, tanks, drone, rockets and such, the shooting war simply adds to a long list of mounting hostilities in an increasingly dangerous world. The threat of China and its ambitions to annex Taiwan, North Korean missiles, incessant warfare in the Middle East, rebel movements in Africa, and regular instances of cyberwarfare have kept defense spending high throughout the last several years, at least in the U.S.

 

The U.S. defense budget has been stable and rising given the quantity of perceived threats. As a result, the defense and aerospace sector have been quietly outperforming the market's returns for the past eight years or more. Thanks to the pandemic, and resulting supply chain issues last year, the industry experienced reduced production, but with the down swing in coronavirus cases (at least in the U.S.) production is getting back to normal. Most Wall Street analysts are expecting government defense expenditures to rise from about 2.8 percent to a range of 3.5-4 percent in the next few years.

 

From an investment point of view, the defense stocks move in cycles; roughly gaining for 7-8 years, underperforming for 2-3 years, and then growing again for another eight years or so. From 2020 to 2022, the industry underperformed, thus setting investors up for what could be a spate of outsized gains.

 

If we look back during the last 20 years of U.S. involvement in the Middle East, defense stocks such as L3Harris Technologies, Northrop, Lockheed Martin and Raytheon gained respectively 1,399 percent, 866 percent, 800 percent and 509 percent compared to the S&P 500 Index advance of 297 percent from 2001 to August 2021. I am not cherry-picking results either; most defense stocks have had similar returns.

 

Obviously, government spending is the largest customer of defense companies. At least 19 members of Congress (or their families) are personally invested in defense contractors, and some of them sit on congressional committees that regulate defense policies. I will avoid the obvious conflict of interest issues that this might raise and just remind readers that politicians on both sides of the aisle have good track records in investing in stocks that they can influence.

 

All indications are that the war in Ukraine is moving to another phase. Military experts expect the war will continue and may evolve into a protracted war of attrition. The China threat is not going away, and now that most western nations are rethinking their defense spending, it appears that we may be starting on a new multi-year cycle for defense stocks.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Speculation is not quite rampant but it's getting there. Volume is tailing off and the short covering that has boosted this market higher is fizzling. These are signs that beg for a nice sharp pull back that is overdue.

 

As I have been suggesting (hoping) over the last two weeks, negotiators from Russia and Ukraine are making progress. Investors are beginning to hear more positive statements from both sides. A combination of factors are pressuring negotiators to cut a deal that would be acceptable to both heads of state. I expect that to happen soon.

 

Remember that we are now approaching planting season in the Ukraine. The spring thaw will also make mobility difficult for the invading forces. The Russian army seems to be pulling back in some areas but bolstering its forces in others. I suspect that has more to do with the Russians' strategic intent to capture and hold areas that contain Ukraine's most valuable energy resources.

 

The stock markets' "fear" trades have already begun to dissipate as evidenced by the slide in oil prices. The red-hot price rise in wheat and fertilize stocks are selling off, and gold is faltering as well. But notice that all this good news on the geopolitical front during the past week has not moved the overall averages up by much. That is a tell-tale sign to me that the good news may have already been discounted and it may be time to take some profits on some of the gains we have enjoyed recently.

 

Of course, the flattening of the yield curve, which inverted for a brief time on Tuesday and Thursday, March 29-31, had the bears jumping up and down. A flurry of bearish commentators lined up to solemnly predict the curve will invert further and a recession is right around the corner when it does. What is an inverted yield curve, you might ask, and why is it so important?

 

According to Investopedia, "An inverted yield curve occurs when short-term debt instruments have higher yields than long-term instruments of the same credit risk." An inversion is the first sign that the long-term growth prospects of the economy are in trouble and have preceded every U.S. recession in the past 50 years. Typically, a recession has followed in the two years after an inversion of this measure.

 

However, before you leap into the lifeboat, remember the same thing happened in August 2019. I warned readers at the time not to jump ship, because I believed the condition was temporary. It was, and I think this time around the same thing may happen. If, over time, all the short term, versus long-term, debt instruments — one month, three-month, one-year, two-year, five-year, versus 10-year, 20-and-30 year — were to invert, well then that would be a horse of a different color. We are not there yet.

 

But my optimism concerning the longer-term prospects of the economy doesn't necessarily translate into the short-term prospects for the stock market. I believe that the financial markets are still not out of the woods. This relief rally off the lows is a bear market bounce in my opinion. It has further to go, but a day or two of pullback next week would be helpful. Unless the S&P 500 Index closes between 4,400-4,500 today (Friday, April 1), I expect next week we will work off some more of this froth.

 

Sometime in late April or May, we may see a return to the bottom once again. Why do I believe that when the latest data show unemployment dropped to 3.6 percent? A combination of persistent inflation, a slowing economy, expected tepid corporate earnings, and an even more hawkish Fed will simply be too much for the markets to take on board.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

The red-hot housing markets is cooling off. A combination of higher interest rates and supply chain shortages are squeezing homebuyers. If these trends continue, the spring selling season may find buyers between a rock and a hard place.

 

The total value of the private residential real estate in the U.S. increased by a record $6.9 trillion to $43.4 trillion in 2021. Since the lows of the post-recession market, the value of housing has more than doubled. By this time in 2023, Zillow expects the typical U.S. home will be worth more than $400,000.

 

This year, demand for housing will remain tight and continuing to outstrip supply. But there are headwinds for homebuyers as well. One of the larger casualties of the Fed's intention to raise interest rates is the mortgage market.

 

Home mortgage interest rates have spiked over the last few months. At the beginning of 2022, the rate for qualified buyers was around 3 percent for 30-year fixed rate mortgages. Today, that same mortgage would cost 4.95 percent, according to Mortgage News Daily. During the past three weeks alone, according to Freddie Mac, we have seen the largest rise in mortgage interest rates since 1987.

 

In practical terms, a family that could manage $2,000 a month in mortgage payments could have afforded the purchase of $424,000 at the beginning of the month. This week, thanks to the rise in interest rates, the home they can afford dropped to $375,000. You might ask how rates could have backed up so much when the central bank has only raised interest rates by 25 basis points in March.

 

The answer is that the Fed focuses on the short end of the interest rate curve. Mortgage interest rates, however, are determined by the long end of the curve. A 20- or 30-year mortgage rate is based on what investors believe the Fed, the economy and inflation will be in the future. Given that inflation is expected to continue higher in the months ahead, and that the economy is expected to slow, lenders see more risk ahead for home buyers. Add in the Fed's stated intention to continue to raise interest rates several times this year (and maybe next year), there is no wonder that long-term interest rates for home mortgages are spiking higher.

 

For the last several years, demand for homes have outpaced supply. As such, home builders are having a hard time providing enough homes to the market. The present supply side problems besetting the construction industry, which were caused by the coronavirus pandemic, have just added insult to injury.

 

A huge shortage of materials is plaguing companies' ability to complete new homes. Lumber shortages have been well-publicized, but everything from siding, glass windows, large appliances and even garage doors have stretched delivery times from week to months. Those product shortages are acute and seem to be getting worse.

 

As mortgage rates continue to climb, it becomes harder for existing homeowners with low mortgage rates under 3 percent to sell and take on higher mortgage rates in order to buy a new home, which continues to cost more and more. This hesitancy further reduces the existing supply of housing stock available.

 

Home prices in the U.S. increased by 18.8 percent in 2021. That is considered an unsustainable level, but given the reduced level of inventory, most experts expect prices on homes to grow 16.4 percent or more in 2022. For homebuyers looking to purchase homes, the call seems to be do it sooner than later rather than later.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.