My Risk Report for 2024

War, Inflation, and a Complete Bond Market Collapse

Fair warning: This is not a joyous and cheerful column.

Of course, we do not live in a joyous and cheerful decade. We live in a tumultuous decade. And that’s what I’m addressing in today’s dispatch.

See, every year the World Economic Forum releases a Global Risk Report that guesses at the 10 biggest risks for the year, and the 10 big risks that exist when looking out a decade.

Usually, this thing appears in January, so we’re a couple months away from the 2024 edition popping up in the media. So, I figured, “What the heck—let’s get ahead of the WEF and publish our own Field Notes Global Risk Report.”

I’m not going to look 10 years forward in this dispatch; maybe I’ll do that later.

Today, I’m focusing on 2024, since we’re so close to the new year that the supermarket down the street from me here in Portugal is already putting out Christmas items before Halloween has even arrived.

Preamble done, let’s go…

War

I touched on this in a recent column, so I won’t kick the horse. I’ll only say that sabers are rattling louder in the Middle East. And I’m not convinced diplomacy will necessarily work.

Israel over the weekend bombed airports in Damascus and Aleppo, Syria, an Iranian ally. That won’t sit well. And Lebanon’s government is talking about prepping the nation for war. That’s not good.

The U.S. is increasing its seaborne strike force in the region, and China has dispatched warships as well.

The drums of a regional conflict beat louder and oil has now pushed back above $90 per barrel.

This could be problematic…

Bond Market Collapses

This is the biggest threat to 2024, as far as I’m concerned.

Bond prices have already fallen off a cliff in recent weeks, and bond yields have soared past 5% across the entire spectrum of Treasury paper—3 months to 30 years. (Note: I am not talking about interest rates the Federal Reserve sets. I am talking about the interest rate on existing Treasury debt. That is set by the market.)

When bond prices fall, interest rates on those bonds rises. It’s the funky inverse relationship the bond market is known for. Bond prices are falling right now because bond buyers are rightly fearful that America’s fiscal situation is increasingly a house of cards. And, worse, it’s a house of cards overseen by a motley crew of Congressional freaks who you’d expect to populate a backwoods carnival in an M. Night Shamalan horror movie.

The fact that bond yields are now at highs not see in 15 years or so tells you the bond market is freaked out. So much so that bond buyers largely avoiding auctions where the Treasury Department sells new debt. And those who are showing up are demanding higher yields because they see higher risk in America.

But, for me, the big risk is that the Federal Reserve—the barkers at that backwoods carnival—keeps saying “higher for longer,” meaning it aims to push interest rates higher, and keep them elevated for a longer period of time. If the Fed does that, then 2024 will be a troubling year.

Commercial borrowers will flail about as they try to navigate rising rates on the debt loads they already have, or as they try to access credit to keep their businesses afloat.

That’s going to flow through the consumer segment as inflation. Companies will raise prices just to earn enough extra income to manage higher debt payments.

And it’s going to flow through banks, which do big business in commercial lending. As commercial borrowers collapse, banks will struggle—leading to more bank failures.

Ultimately, a bond market collapse will have global ramifications because U.S. Treasury debt is the de facto savings vehicle for much of the financial world. 

Inflation Rises Even More

This ties in with the above concern, but from a different perspective.

The Fed doesn’t seem to comprehend the idea that higher interest rates don’t really do an effective job of tackling inflation. I mean, think about what higher interest rates do: They raise the cost of producing finished goods. And, as noted above, they raise the cost of running a business.

Those costs always flow through to the consumer.

The Fed isn’t the only villain here.

Oil prices are problematic too.

They’re rising, and not just because of a conflict in the Middle East.

They’re rising because oil supply is not keeping up with growing oil demand. That’s happening for a variety for reasons (not enough investment in finding new reserves to replace decaying supplies; OPEC production cuts; et. al.) Whatever the reason, the upshot is that oil demand is closing in on 103 million barrels per day, while oil supply is about 100 million barrels per day.

The gap is being filled by above-ground storage, but that supply is dwindling quickly… which is going to see the daily supply-demand gap become increasingly apparent and significantly more important to pricing. We’re very likely to see oil above $100 again in 2024, which will push up gasoline prices and the supply costs for manufacturers, since petro products go into so many consumer goods.

Meaning… inflation lives again after taking a short breather in 2023.

Food Inflation

If oil prices weren’t enough a problem—compounded potentially by an escalating Mid East war—we have the weather pattern known as El Niño strengthening.

So far this millennium, El Niño events have produced food inflation, and have been particularly hard on cereals like wheat, rice, and corn, as well as sugar, palm oil, and citrus fruit.

Brazil (#1 producer of sugar cane, soy bean, coffee, and oranges); India (#2 in rice, wheat, sugar cane, and potatoes), Indonesia (#1 in palm oil; #3 in rice) and Australia (#4 in barley and rapeseed) are all expected to see their agricultural yields fall. In the U.S., El Niño tends to reduce winter wheat yields and befouls the harvest of crops like corn and peanuts.

As such, 2024 will quite likely see greater-than-average—maybe even extreme—tension on food supply and demand… which just leads to food inflation that will certainly flow through U.S. supermarket prices.

Like I said up top, not a joyous and cheerful column. But it is what it is. And for us, that means better to prepare for what’s possible rather than be surprised by its arrival.