Welcome to your November issue of the Global Intelligence Wire.
This is the monthly digest exclusively for Global Intelligence Lifetime Circle members, in which I cut through the media chatter and highlight five underreported news stories from recent weeks.
This month, we start with a quote:
I want to say this loud and clear right now, that we risk a very low crop in the next harvest. I’m afraid we’re going to have a food crisis.
That’s what Svein Tore Holsether told Fortune magazine at the recent COP26 climate conference in Glasgow, Scotland. And who is Svein? The CEO and president of Yara International, the Norwegian fertilizer giant we own in the Global Intelligence Portfolio.
In your November issue, I wrote about the global energy crisis now unfolding. Well, because of that, the cost of producing nitrogen has taken off like a moonshot. (Natural gas is the key feedstock that goes into the production of ammonia, which is then transformed into a form of nitrogen readily accessible to plants, as I wrote about in the April issue.)
For Yara, the cost of producing a ton of ammonia has jumped to $1,000 from just $110 last summer—an insane, near-10x move.
Clearly, that flows through food prices, since nitrogen is the primary fertilizer that farmers use to enhance crop yields…which helps explain the food price inflation racing through the grocery aisle these days.
But here’s the bigger problem: Yara has actually been curtailing nitrogen production—down 40% since September—because raw material costs are just outrageous. And Yara’s not alone in that; other fertilizer makers are doing the same.
Play that out and we’re talking about reduced food production…and even higher prices. This is going to exacerbate the commodity super-cycle I’ve been writing to you about, and it’s going to push global inflation rates even higher…even as it bankrupts smaller farmers.
We’re beginning to see this take shape in our shares of Yara. We’re up more than 11% at the moment, and the shares have been in a solid uptrend since late September. Seems a non-sequitur, I know. But even while Yara is reducing production, prices for nitrogen fertilizer are soaring. So, it’s the old “bad news is good news” phenomenon that’s common on Wall Street.
There’s more to come. Good news for our position…not-so-good news for consumer pocketbooks.
Uncle Sam Releases a Shortsighted Report on Stablecoins
Next up this week…the Biden Administration has issued a much-awaited report on stablecoins, crypto assets that are designed to be, well, stable. These cryptocurrencies don’t fluctuate like bitcoin, Ethereum, and others. They accomplish this by pegging their value to the U.S. dollar, gold, or other fiat currencies.
The report is…well…not very well-thought-out.
It’s main message: Protect the banking sector at all costs!
The report notes, among other suggestions, that Congress should look to “limit stablecoin issuance, and related activities of redemption and maintenance of reserve assets, to entities that are insured depository institutions” and “prohibit other entities from issuing payment stablecoins.”
Read between the lines and that’s basically saying that only big banks should be allowed to issue stablecoins.
I totally understand why the working group that compiled the report is freaked out.
Right now, more than $143 billion has flowed into the more than 60 stablecoins that currently exist. The big kahuna is Tether, with more than $74 billion in assets. Next closest is US Dollar Coin (USDC), with $34 billion. In very real terms, that means nearly $150 billion no longer exists in the banking sector. It has literally been turned into a digitized asset that now exists on the blockchain.
And let’s ask why?
Right now, you and I can go trade a bitcoin or whatever crypto, and on the blockchain that trade settles instantly, or within a couple of minutes. But money takes days to clear.
I mean, go buy crypto at Coinbase or Binance.US and use your bank account. The crypto shows up in your account immediately, but Binance, in particular, locks down your coins for 10 days while the cash financial transaction clears. That’s a big problem when you’re trading in a volatile asset like crypto.
Stablecoins solve this problem by allowing traders to instantly move between an unstable asset such as bitcoin or Ethereum and a stable one like USDC.
Ultimately, this stablecoin issue is going to be a challenge for the U.S. government because many stablecoins exist outside the U.S., where Uncle Sam has no authority. He can make it illegal for Americans to own stablecoins, but when exchanges exist globally, such dictates are as effective as a toothless poodle.
Moreover, such a dictate would harm American businesses and consumers, limiting their ability to move from crypto into stablecoins for safety, and limiting their ability to earn real rates of interest (in the double digits) on stablecoins at crypto-banks like BlockFi.
China’s Property Woes Could Hit the U.S. Economy
Next, we pop across the Pacific to check in on the ongoing Chinese property woes.
In last month’s edition of the Wire, I mentioned to you the issues going on with China Evergrande, one of the Middle Kingdom’s largest property developers, and one I met with in Changsha about a decade ago when it was 10x smaller and growing like a weed.
Today, Evergrande is deep in debt and the Chinese government rightly worries that an Evergrande implosion would overrun the economy like a tsunami. That could destroy the housing market, lead to widespread unemployment, slow China’s growth dramatically, and rip through the global economy.
Now, the Federal Reserve here at home is saying it has concerns that just maybe the stresses in China’s property market could flow through to the U.S. economy as well.
The problem is no longer just with Evergrande. It turns out that several other Chinese property developers are also struggling with massive debts. Bond ratings are coming down, stocks prices for property developers listed in Hong Kong are flagging, and debt repayments are being missed.
Not. Good.
China’s economy in meaningful turmoil will present global challenges. And those challenges arrive at a pretty rotten moment. The world is battered right now by massive supply-chain disruptions, which are exacerbating the commodity super-cycle that’s underway.
China disruption has the potential to make supply-chain problems even more severe, which would impact all of us.
Where does this go?
I still think the Chinese government intervenes in some way. But what that way is, I don’t know.
I don’t think China wants to risk social and economic upheaval. It will let some debtors suffer. It will let some developers collapse. All abject lessons to those that survive and those that China steps in to save.
Even at that, though, we could very well see some global stock-price weakness in coming weeks and months.
The Fed Tightens the Free Money Tap…But Refuses to Act on Inflation
Meanwhile, back at the ranch in inflationary America…
The Federal Reserve has decided to keep on keeping on, meaning it has decided to keep on doing nothing in the face of persistent inflation. The Fed will, however, begin tapering a bond-buying program that, at this point, seems to have been in place since FDR was president.
How Wall Street reacts when the reduction in bond buying starts later this month will be interesting.
Will the Street collapse into a “taper tantrum,” as it has done in the past? Has the Street matured to the point that it will blithely go on with nary a hiccup? Hard to say. The Fed has been telegraphing this move for quite some time, so maybe the Street has factored this into its calculus.
Or maybe Wall Street loses its mind.
Or maybe all is well in the immediate aftermath, but then crumbles into a heap a couple of weeks or months later. We shall see.
Personally, I think Door #3 is likely: All is peachy early on, and then Wall Street realizes weeks later that far less cash is flowing into stocks…and boom goes the dynamite.
In the meantime, we still have inflation to consider.
Fed Chair Jerome Powell insists that his very foggy crystal ball tells him that inflation is just a soap bubble floating through the economy temporarily, but will soon pop and all proof of its existence will be forgotten. Of course, he also says the currently higher-than-expected inflation will persist “well into next year.”
The financial markets aren’t so sure the chairman is right with his transitory hood-winkery.
Interest-rate futures—an obscure little submarket—now imply a roughly 75% chance that Powell & Co. raise rates by at least a half percentage point next year. And there’s a better-than-40% chance the Fed will raise rates by at least three-quarters of a point.
All sounds a bit esoteric, I realize, but these are the rates that flow through everything from credit cards and home-equity lines-of-credit to mortgage rates.
If interest-rates futures are right, 2022 is going to be a more expensive year. And it will very likely hit the housing market, since rising mortgage rates tend not to be so great for housing prices. That would potentially have negative knock-on effects for consumer sentiment, which would flow through stock prices.
Happy New Year!
Major Australian Bank Begins Offering Crypto Through its App
Finally, let’s head to the land Down Under…
Australia’s Commonwealth Bank, one of that country’s big four “Pillar Banks,” has announced that it will allow customers to buy crypto through its banking app. That makes the Aussie bank one of the very first traditional banks in the world to merge mom-and-pop banking with the new age of crypto.
To me, this is big news.
U.S. banks so far have been leery to jump into this world. Techy financial-services firms such as PayPal and Square are neck-deep in crypto and doing well with it. But all those street-corner banks across America have not pulled the trigger (except for Silvergate Bank in San Diego that has exploded higher on Wall Street because of its crypto deposits).
That’s going to change next year.
As I’ve pointed out a few times in my Field Notes columns, Visa, Mastercard, and others are working on back-office systems that will allow America’s thousands of banks to begin offering crypto buy/sell/custody services for savers who don’t have the inclination to trade through crypto-specific accounts, but who know that they’re missing out on an opportunity.
The cryptosphere is morphing so fast that novelty today is damn-near ancient tomorrow. There’s no way to stop this innovation. There’s no way to slow it. We really are participants in a financial revolution reality show unfolding in real time. Problem is, it’s happening outside the view of so many who refuse to accept that crypto is basically Web 3.0—a whole new internet and a whole new way of conducting your life.
Commonwealth Bank’s announcement is an indication of that. It says demand is exploding from consumers who don’t care about government and who recognize government is more of a hindrance than a partner.
Basically, what I am saying is that crypto is rapidly moving toward a billion users or more. Massive wealth opportunities are coming from that.
And with that, I’ll wrap up this month’s Global Intelligence Wire. If you have any feedback or any topics you’d like me to address in a future issue, you can reach me through the contact form on the Global Intelligence website.
Have a fabulous Turkey Day later this month, and talk to you again in December. Thanks for reading and here’s to living richer.
