WealthFort

BOND YIELDS ARE RISING AMID THE OIL CRISIS

As the oil crisis enters its 8th week, bond yields have risen to worrying levels that could unravel the pension funds that invested in them (bonds are often seen as a safe haven), and cause global inflation to spike.

Besides the rise in crude oil prices, prices of urea and sulfur have also risen in tandem. For many countries that have not diversified their energy base, crude oil is the primary source of energy to power the economy. A country that cannot meet the demand will see a slowdown in economic activities after the oil reserves run out. Many countries in Asia and Europe are facing this prospect.

Urea and sulphur are needed to synthesise fertilisers, without which, global crop production will be at risk. Right now, the number of US farmers declaring bankruptcy US has risen +46% YoY due to the high cost of diesel and fertilisers. The US is a top grain exporter. India, which is a top rice producer and exporter, is facing a major shortage of fertilisers needed to ensure food security. If the Strait of Hormuz remains closed for longer periods, many countries will experience starvation and famine. The chart below shows how fertilisers impact the global population.

The bond market is pricing in high inflation. US bond yields are rising, with the 10Y yield is 4.40%. The US Treasury is desperately trying to cap the yield via YCC (Yield Curve Control). For the unaware, the US Treasury bought back USD47B of its own bonds in April. Yes, you read that correctly. It is issuing debt to buy back its own debt. Total government debt is now USD39.2T and will exceed USD40T by the end of this year!

In Europe, the UK's 10Y yield is 5.05% - the highest in a decade. Germany's 10Y yield is 3.10% - the highest in a decade. Japan's 10Y yield is 2.5% - the highest since the late 1990s. The Yen is now trading above 160 to the Dollar. Inflation will resume its rise. Meanwhile, the BOJ is trying to address the crisis through narratives. Japanese pension funds are imploding as many have invested in JGBs when yields were in the negative territory. The 10Y yield, for example, has gone up more than 9x. The BOJ can hike interest rates to arrest the free fall in the Yen. But it can't because Japan's public debt is 250% of its GDP. So, it continues to address the crisis through narratives. This could only end in tears for the population as inflation spirals out of control and pension funds get destroyed.

The stock market is mispricing the risks. The bond market is not.

PC Wong

✨ Selamat Menyambut Hari Raya Aidilfitri! ✨

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WHAT HAPPENS NEXT AFTER THE US ATTACK ON VENEZEULA

The US is signalling to the world that unless you have a strong military, you will always be subject to regime change and theft of your country's resources.

The obvious conclusion is that the US has pivoted to the Americas in a bid to establish it sown supply of critical minerals which are found in abundance in the continent. In the process, it hopes to choke China off the supply as well. The US venture in Venezuela is just the beginning and we shall soon see more regime changes and occupation taking place. Colombia, Mexico and Cuba could be next in line. We are seeing a return to the Monroe Doctrine.

Based on this premise, we may see more countries expand militarily, thus creating regional arm race. A few may seek to acquire nuclear weapons. They will compare North Korea (with nuclear weapons) against what happened to Venezuela, Iraq, Libya, Syria and Afghanistan.

Countries will become increasingly nationalistic and this could hamper global trade. The ensuing arm race will push up the demand of critical minerals and nationalistic behaviour will worsen the supply chain.

China will accelerate the build out of its green energy and stock up on critical minerals (uranium, silver, copper, etc). It will hasten the electrification of its economy including its arms industry to reduce its dependence on oil. Don't be surprised if China sees the need to develop many SMRs which are quicker to build to power the grid.

Through its action, the US has lost its diplomatic premium and many countries will begin to fortify their trade amongst friendly nations in local currencies.

Some argued that Venezuela's oil can help lower inflation in the US. But oil price is already very low; yet inflation still persists in the US. Also Venezuela's oil is heavy oil and with high sulfur content. It needs to be blended with light oil to enable refining to take place. The US oil companies are just not going into Venezuela and turn on the tap. They need to replace or rehabilitate the oil infrastructure which has become decrepit due to poor maintenance.

So far, few have given thought that the population could revolt and the US will have to put boots on the ground and in the process commit hundreds of billions of dollars into the occupation that could lead to it being in a quagmire. Remember Vietnam and Afghanistan?

The US will face yet another potential shutdown on 30 January if Congress could not agree to a funding package. How much would boots on the ground cost the taxpayers this time? Meanwhile the debt bomb ticks higher at USD38.5T.

PC Wong