The next few years are therefore likely to be very different from anything that we have known in our working lives. Scenario planning is therefore essential in the face of this uncertainty.
Chemicals and the Economy
As the head of Germany’s Employers’ Associations warned last month: “We are facing the biggest crisis the post-war Federal Republic has ever had. We have to be honest and say: First of all, we will lose the prosperity that we have had for years”.
Social and political issues were always more important than economics before the SuperCycle. And now they are resurfacing again. Does an individual woman have the right to choose what to do with her body? Or can judges tell her what she can, and can’t do? It is early days, but many women may choose to vote Democrat because of this issue in November.
The history of the 1929 and 2000 downturns suggests the real pain is yet to come. Housing markets look terribly over-valued around the world, as I noted last month. And US consumer sentiment is at all-time lows. So most company earnings seem set to fall, with more than 60% of US CEOs now expecting to see a recession.
Markets have returned to the 1970s. They have to cope with “Putinflation”, recession, rising interest rates and energy prices – as well as geopolitical and nuclear risk. Unfortunately, today’s traders do not even have the experience of the 1960s as a guide, having lived in a different world for 20 years.
The market downturn couldn’t have come at a worse time for Apple. It was already facing major supply chain chaos in Q2. And now it has to face a major decline in the smartphone market itself. Inevitably this will lead to a brutal battle for market share as companies struggle to survive.
Central banks and investors believed stimulus programs had created a “New Paradigm” where asset prices would always increase. Now they are starting to realise that stimulus is irrelevant against the 3 Horsemen of the Apocalypse – China’s continuing battle with the pandemic, Russia’s invasion of Ukraine, and potential for famine as rising gas/fertilizer prices mean farmers can’t afford to grow their crops or feed their animals.
The seeming genius of many private equity funds in recent years has been based on this ability to borrow at cheap rates during the ‘up’ part of the business cycle. Now we are heading into the ‘down’ cycle. And the central banks have abandoned Bernanke Theory and are back to worrying about inflation. So today’s excess leverage means many over-leveraged companies will go bust.
These are difficult times, and there is no guarantee that they may not get worse. But they also remind us of the critical need to move beyond the Age of Oil, and develop more sustainable energy resources for the future.
The issue is simply that investors are in a state of Denial. And so there is a growing risk of a financial crisis as reality finally dawns on them.