Inflation hits 15%, the fossil fuel boom and a hypersonic cold war begins … Here’s the forecast for 2022


For the first time since World War II, US inflation could reach 15% in 2022, as a perfect storm of events creates massive price increases.

This is what Saxo Bank says in its “scandalous” forecasts for the coming year. But the logic he sets out in his last report doesn’t seem so far-fetched.

Federal Reserve Chairman Jerome Powell believes millions of Americans will return to work and fill some of the 10.4 million open positions as Covid-19 wears off. “But that’s totally wrong,” says Christopher Demik, head of macro analysis at Saxo Bank, headquartered in Denmark.

Early retirement has meant the US workforce is much smaller after Covid. Other workers realized that they no longer wanted to work grueling hours for low pay. They demand a better experience: better working conditions, higher wages, more flexibility and a sense of the work to be done. “The pandemic has created a wake-up call for workers,” Demik explains.

Employers will therefore have to increase wages for less desirable jobs. These increases could reach the “unprecedented” double-digit bar. Combine that with all the other inflationary pressures, an energy crisis, and a disruption in the supply chain, and suddenly things get out of hand.

In such a scenario, the Federal Reserve will try to react, says Demik. “But it’s already too late. He’s lost his credibility.” According to Saxo Bank, US inflation could exceed 15% before 2023.

The result will be extreme volatility in the US stock and credit markets as the Federal Reserve tries to regain its credibility and reduce inflation to single digits.

But not all forecasters are so gloomy. According to Oxford Economics, CPI inflation will exceed 5% in the UK, but only until April. After that will slow down sharply. “There is little evidence of a build-up of underlying pressures, commodity prices are expected to drop and significant negative base effects will kick in,” its latest UK 2022 theme report says.

Fossil fuel investments skyrocket as Cop26 targets ignored

With inflation continuing until 2022, policymakers are likely to “set climate targets later,” Saxo Bank said.

Again, this prediction is based on today’s realities. The energy crisis is already having a very direct impact on inflation. And it’s not just heating fuel, which the northern hemisphere needs most at this time of year, but almost all goods and services.

The availability and price of many petroleum-based fertilizers will drive up the cost of agricultural products in 2022, for example. The same goes for building materials, like cement, which use fossil fuels in their manufacture.

This is not helped by green taxes and environmental policies which make it both more expensive and more difficult to sell petroleum products. “The problem with this,” says Ole Hansen, head of commodities strategy at Saxo Bank, “is the fact that we need energy and we need metals in order to ensure this green transformation.”

Governments could intervene by “removing some of the restrictions on investment in these sectors,” he said. For example, red tape around oil production could be suspended for five years and natural gas production for ten years, both to curb inflation and to allow the green transition to progress.

“Investors should maintain a pragmatic approach given the wide gap between net zero ambitions and potential outcomes,” said Frédérique Carrier, head of investment strategy at RBC Wealth Management. The Canadian bank warns that the net zero ambitions promised at COP26 are huge. , including funding.

William Nordhaus, professor at Yale and winner of the 2018 Nobel Prize in Economics, estimates that it would take between $ 100,000 and $ 300 trillion in new capital globally to reach zero net emissions by 2050.

Inflation could dramatically increase this estimate, forcing governments to delay, suspend or completely abandon any climate commitments they made in 2021.

A hypersonic cold war begins

In October, the Financial Time broke a heartbreaking story: “China is testing new space capability with hypersonic missile.

The test, which took place secretly in August, stunned US intelligence. The Chinese rocket circled the globe before narrowly missing its target, going under the radar in both metaphorical and literal terms.

This sets the stage for Saxo Bank’s next outrageous prediction: a hypersonic arms race.

Already, the United States is scrambling to rework its hypersonic missile program, far behind that of China. Saxo Bank predicts that India, Israel and the EU will join the United States, China and Russia in developing hypersonic missile programs.

This would lead to a new cold war which “is not only between the United States and China, but also with other players in the world,” said John Hardy, head of FX strategy at Saxo Bank.

As more countries develop hypersonic missiles, the theory of “mutually assured destruction” that countries do not launch a nuclear attack for fear of immediate retaliation becomes obsolete.

Until all the major world powers acquire hypersonic missiles, there will be an arms race. There will be “massive insecurities about legacy, conventional and nuclear capabilities,” Hardy said. But there will also be a huge increase in defense spending similar to the last Cold War. “We see in the financial markets space a rush to fund companies involved in the hypersonic space.”

Unlike the last Cold War, however, there is unlikely to be a battle for the territory. Hypersonic missiles can fly around the globe and therefore do not require a launch base in another country, such as Cuba.

Saxo Bank would like to stress that this is not its official market forecast for 2022. But investors might consider that there is only a one percent chance that these events will materialize.

Some investors are already ahead of them. Oil exchange-traded funds (ETFs) that track oil producers and service companies rallied last month, for example. And there are few rich people who have not yet prepared for further inflation.

On the other hand, the actions of defense companies, such as Raytheon, Lockheed Martin

LMT
, and BAE systems have all fallen since China’s hypersonic missile test was announced in October.

The predictions, however scandalous, are inconstant. Saxo Bank does not have a great deal of experience in making its predictions come true. Two years ago, no one was talking about a global pandemic sweeping the world, forcing people to stay at home and plunging economies into recession. It would be just too outrageous.


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