Ingram's December 2022

I N A N U T S H E L L

by Ken Herman

Supply Chain: Here We Go Again …

We got close to full recovery, then unexpected factors, as always,

with its largest surge of cases on record. China’s central leaders have seen their zero-COVID policy as a source of national pride, show casing the perceived superiority of their system (compared with the death tallies and infections seen in many Western nations). Recent lockdowns may be driven by fears that major outbreaks would over- whelm China’s health-care system, given the population’s low natural immunity.

intervened to disrupt the flow of goods. Stocks had happy trading sessions pre- and post Thanksgiving. The positive sentiment may even hold up after the turkey leftovers. However, and this is a big however, things in China are beginning to concern global leaders. Renewed COVID-related disruptions in the supply chain, plus related civil unrest throughout that country amid lockdowns, can’t be ignored. After nearly three years of disruption, supply chains were almost back to normal. Shelves should be fully stock

ed, and some prices may actually be low er this holiday season. No one wants to go back to what we experienced in recent years. The stock market is near where it was last February, so we are wonder- ing whether we have already seen the lows for this bear market. For mid-Oct- ober to be the low, we need the Fed to stop its rate hikes before they break the economy. Recent 75 basis point hikes have not significantly impacted economic num- bers—yet. If the Fed is done with such large rate hikes, we should see a “soft landing”, provided the war in Ukraine does not escalate, and China does not boil over. Even though many uncertainties are not yet resolved, the market is bet- ting on a Fed rate hike slowdown and a top in Treasury yields. But if the Fed

Mobilizing pub- lic anger and undermining con- fidence in the government were not its goals, but China’s has done just that. While officials earlier said they would be more specific and tar- geted in imple- menting pande mic controls, no fundamental chan- ges were made to China’s overall z e r o - C O V I D stance. China also

Even as things sort themselves out in the U.S., the zero-COVID policies enacted by the authoritarian Chinese government threaten to disrupt global commerce again. What impact will that have on the markets as we move into 2023?

funds rate is going to 5 percent, as Fed funds futures seem to indicate, then another spike in Treasury yields is not out of the question. You will know that the Fed funds rate hikes are working when the stock market stops respond- ing to lower treasury yields and credit spreads begin to expand, neither of which has happened yet. We must now also face more unknowns about China’s future. China resumed very unpopular COVID lock-downs without knowing if it is even possible to contain the virus that way, given a dense population of 1.3 billion people. And now China’s citizens are rebelling as best they can. This month marks three years since the first COVID-19 case was reported near Wuhan, but China doesn’t seem to be letting up on its strict coronavirus policies. In fact, quarantine facilities and makeshift hospitals are expanding across the mainland to deal

has a credit bubble that is bigger than any in history, but it is impossible to predict when it may “pop” because the economy is uni quely managed. The government controls the banking system and injects lending quotas, in effect re- inf lating the credit bubble every time the economy weakens. Assuming China’s COVID out- break remains serious and lock downs are successfully enforced, any new bank quotas probably won’t work well. Could China’s credit bubble also finally pop?

Ken Herman served as the Managing Director of Bank of America Global Capital Markets and was the Mayor of and served on the City Council in

Glendora, Calif. E | Editorial@

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December 2022

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