Shortage of supplies and the end of globalism: The third Horseman

It is just the beginning of a new crisis, and the current situation shows how fragile is the supply chain. Economies of the most developed countries rely on long supply chains, resulting from a strategy of production delocalisation in emerging countries. Therefore, in critical situations where the supply is disrupted, and the alternatives are limited, the developed economies are confronted with a shortage of supplies.

The governmental measures to tackle the spread of the current pandemic by imposing lockdown policy generate a wave of panic. The irrational consumption behaviour and the stringent demand for products, including primary supplies like pharmaceutical drugs or food as well as items as simple as toilet paper lead inevitably to a shortage of supplies. Governments would need to step up and make sure that the citizens can fulfill their basic needs.

Most developed countries may transform for a few months into big prisons. During the lockdown, people may have much time for reflection, and for sure, most are thinking about the reasons an advance society is not resilient to the spread of disease. The foreseeable crisis is, without any doubt, a consequence of aggressive globalism promoted over the past four decades. The globalism provided with low-cost products and services but exposed the developed countries to new risks. One of these risks is the systemic disruption of the supply chain that would leave many countries with a shortage of goods produced overseas. The good news is that once this crisis will be over, a new economic age will raise and we should observe a return of industrial production in Western countries.

When He broke the third seal, I heard the third living creature saying, "Come." I looked, and behold, a black horse; and he who sat on it had a pair of scales in his hand. And I heard something like a voice in the center of the four living creatures saying, "A quart of wheat for a denarius, and three quarts of barley for a denarius; but do not damage the oil and the wine. (Revelation 6:5–6)

Market overview

Dow Jones lost in one week all its cumulated gains since Trump’s election. Last Thursday, stock markets experienced the biggest daily contraction since 1987. The Dow Jones recovered on Friday reacting positively to president Trump reassuring speech, but signs of recovery are not under the horizon. The global economy goes through total or partial lockdown. There is trade-off between the spread of the pandemic and the severity of the crisis. Countries opting to contain the pandemic at all cost will be hit hardly by the recession , while countries like the UK that opt for the herd immunity may preserve better their economies.

Weekly focus:

Bitcoin

Why Bitcoin dipped by more than 50%? Most crypto-believers saw Bitcoin as a safe-haven that is more resilient than fiat currencies when a new crisis will arrive. The crisis has arrived, and we see that Bitcoin, as well as the leading cryptocurrencies, are more fragile than the traditional financial markets. With the May halving approaching, Bitcoin’s perspectives are very murky. On the one hand, if the pandemic is contained rapidly, the Bitcoin could resurge and go through a strong rally.

On the other hand, if the crisis aggravates, it could threaten the viability of the entire Bitcoin system.

The high correlation between Bitcoin’s price and other markets underline that big financial institutions have built before the crash massive positions in crypto-currencies. Margin call mechanisms on traditional markets pushed banks to liquidate their positions in non-core markets.

Meanwhile in the commodities market

The trilateral price war between OPEC - Russia – US sent crude oil into a massive decline. The Brent found support level at 30 USD, but there are fears of further dip. Interestingly the agricultural commodities did not follow the same abrupt pattern. The frozen orange juice (FCOJ) had a stable evolution over the past month.  With the supply shortage beaming real, there are all the reasons to expect an increase in the soft-commodities’ prices.  The physical supply-demand equilibrium should drive the commodities price over the next month, and the term structure could move into backwardation in the medium to long run.

Market outlook

Markets should continue to evolve in negative territory. The first signs of recovery should appear towards the summer when the pandemic should retreat. Gold prices should return sooner in positive territory, thereby being one of the few safe-harbours.

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