Roberto CoelhoBy Roberto Coelho|January 4, 2022|7 Minutes|In Opinion


"Shapiro on 2021 and scary markets"

Before we look at the prospects for 2022, Billionaire Tomorrow takes stock of 2021 – another tough year – with David Shapiro the king of the Johannesburg Stock Exchange with 50 years working in the markets.

In the words of markets veteran David Shapiro, two words controlled the narrative in 2021: “transitory inflation.”

The term was coined by the Chair of the Federal Reserve of the United States, Jerome Powell in 2021; pundits have argued over it ever since.

Yet, as the year closed, it is becoming clear the current high inflation numbers are not transitory. Even Powell calls it “frustrating.”

Not only is it frustrating for the Federal Reserve and reserve banks; governments and consumers are feeling the heat. People are pressured to buy more with the same salary.

This has led to higher wage demands, specifically in the USA, together with an imbalanced labor market where the number of vacant jobs out strips the number of workers.

“The worrying side are not the inflation numbers; it is the wage expectations.”

Shapiro understands continuous wage increases mean inflation.

Higher wages forces companies to increase the price of goods and services, in turn consumers cannot afford these items,so they ask for higher wages. It becomes a vicious circle.

“The fear of inflation, is excess jobsand wage demand.”

As inflation continues at its high pace, global equity markets seem unconcerned.

The annual return from the S&P 500 has yet again topped 20%, some attribute this to long-term thinking and ignoring the noise; others to complacency.

The one metric aware of inflation is the US 10 Year Treasury Bond, commonly referred to as the ‘cost of money.’

During the worst of the pandemic, the all-time low was 0.48%, signaling major concern as investors piled into what is often called the safest asset on earth.

Shapiro views this as a sign of confidence, the low bond yield suggests a lack of confidence.

Currently the yield is 1,4%, not as low as in 2020, yet still lower than any point before the pandemic.

“The world is not back to normality yet; we need confidence to build our economies.”

If the 10-year bond is a sign of confidence, bond traders may be signaling a recession ahead.

Some background to this statement, the bond yield needs to be above the current 6% US inflation rate toearn real returns.

Using South Africa as an example, there is an 9% yield on the South African 10 Year bond, with inflation at 5.5% currently, thus earning a real return of 3.5%.

In the USA there is a negative real return of 4.6%.

“The 10-year bond is a worrying sign, indicating possible stagflation.”

Stagflation occurs when inflation is at a higher rate than economic growth.

Thus, next year if inflation remains at 6% but US GDP growth is 2%, this would be stagflation.

It is a central banker’s worst nightmare, leaving the inability to reduce rates to stimulate the economy because of the high inflation.

When predicting the possibility of this, it may seem unrealistic, yet Turkey has provided a real-life example in 2021.

Turkey’spresident, Recep Erdoğan, has essentially taken control of the central bank and forced rates lower regardless of double-digit inflation.

He believes ‘lower rates reduce inflation.’ This belief proved false and the Turkish Lira has tumbled continuously in 2021. It is , the worst performing currency, of major currencies, in 2021  when compared to the Dollar.

Moving from central banks to national governments, Shapiro is disappointed that an opportunity for international solidarity was wasted in 2021.

“This is a missed opportunity, and with the new variant we know no one is safe until everyone [globally] is vaccinated.”

Starting in 2020,there was a clear division between nations, as each nation focused inwardly. This is the natural response, yet in doing this there was no global coordination to stop the pandemic.

However, it seems the world is reaching the end of the pandemic, thus the lack of global coordination becomes a fear for future crises. The most immediate being China’s increasing threatening behavior towards Taiwan. After this, the threatof climate change.

“Because of the pandemic, everyone has taken steps and had a look at what is important to them, the climate is important,” says Shapiro.

However, to solve this problem countries must work together to achieve the necessary change.

This change presents business opportunities as seen by the meteoric rise of Elon Musk’s Tesla.

“The world is going to evolve and there is immense opportunity to come.”

To take advantage of these opportunities one must look through the current chaos to the bigger picture.

When historians look back at 2021, it may seem irrelevant when compared to 2020, such as 1988 is viewed when compared to 1989.

Yet, when looking closer, 1988 was a pivotal year, globally discussions continued between the USA and the USSR. Locally discussions increased between Mandela, the ANC, and the National Party.