Ukraine Crisis Overshadows Everything
We are two weeks into Russia’s invasion of Ukraine and the war has clearly entered a new stage. The strength of Ukrainian resistance appears to have been initially vastly underestimated by the Kremlin, which has increasingly doubled down with systemic shelling and greater violence unleashed upon civilian population centers. According to the United Nations (U.N.), more than 1.7 million Ukrainians had fled their country by Sunday, March 6th with those numbers exponentially growing as the Russian military increases its bombing campaigns. The U.N. estimates these numbers could hit 4.4 million (roughly 10% of the total population of Ukraine) by the end of this month. Meanwhile, the International Monetary Fund (IMF) warns that the invasion could have a severe impact on the global economy.
The human cost of the invasion aside, the economic impact of the crisis will hit Europe hardest. Europe trades with Russia at roughly 10 times the pace of the United States, which is why European stock prices have fallen by roughly 20% per share vs. a +/- 10% drop in the US. As of this morning, the price of crude oil stood at $116 per barrel, with Goldman Sachs economists predicting that a sustained $20 oil rise shock would slow European GDP by 0.6% and US GDP by 0.3%. They also warn that sustained price shocks beyond this level could shave GDP economic output numbers by twice those rates. Keep in mind, that before the current (as of the start of day 3/7/22) oil price of $116 per barrel had hit as high as $130 per barrel on the previous day of trading before settling at this rate. Meanwhile, while Western sanctions have purposefully avoided the energy sector simply because of the potential damage to European economies that had increasingly become dependent upon Russian natural gas and oil, a de facto ban seems to be emerging. Besides large global players pulling out of Russia at a substantial cost (Shell, BP, etc.), many banks (Credit Suisse, Rabobank, Societe Generale, ING, Bank of China, etc.) are refusing to extend credit to anyone to finance the purchase of Russian oil. Meanwhile, some tankers are refusing to load anything at Russian ports or carry Russian oil while insurance companies are also starting to refuse coverage to tankers visiting those ports.
It all means that U.S. gas prices are climbing and it will get far worse before it gets better. The average price of gas in the U.S. climbed $4 per gallon for only the second time (the other was in 2008). Analytical firm GasBuddy predicts that the average price nationally will top $4.25 per gallon for Memorial Day. Of course, that is the national average. For example, I live in California (the most expensive state) where the current average is $5.32 per gallon. The cheapest state currently is Iowa, where the price is averaging $3.76 per gallon.
All of this is obviously challenging news; inflation is already at a 40-year-high and this will drive it higher. The last reading of the consumer price index (January 2022) had it up 7.5% (with energy and food prices being the biggest drivers). This was before the impact of invasion-related sanctions. So, it will go higher, the question is how much? February numbers will be released shortly, but won’t really register the impacts of the crisis yet. It is not outside the realm of possibility that this number could hit the 10.0% mark a few months down the road if the situation worsens or is prolonged. This could prompt a stronger Federal Reserve response than expected—we already anticipated that the Fed would start raising interest rates to rein in inflation numbers with at least three hikes this year beginning at their next meeting. This situation could mean incremental increases are more substantial.
Of course, all this news has overshadowed a full week of happenings in our little sector. First off, as glum as those inflation numbers are, we are a long way from the situation we were in the last time we saw CPI numbers in the +7.0% range. 40 years ago, we were in a stagflation environment; double-digit inflation and double-digit unemployment… hence, a stagnant economy with high inflation. But the latest job numbers came out last week indicating over 670,000 new jobs and an unemployment rate of just 3.8%. Our challenge on the labor front is a worker shortage and (as of the last Job Openings and Labor Turnover Report) a near-record number of available jobs (10.9 million).
Meanwhile, retail sales numbers for February won’t be available until next week but they likely will reflect a strong performance. In January we were up 12.7% (year-over-year) despite the challenges of Omicron. With that fading, all metrics around foot traffic, restaurant reservations, and travel have shot up. Expect a strong retail sales report ahead.
This, of course, leads to the other sector news that has been happening in the past week… for the most part, a lot of new store opening announcements and ramped-up growth plans. There is one exception, of course, and that is Amazon’s announced closure of all 68 of their Amazon 4-Star and Bookstores in the U.S. and England (58 total in the U.S.). Spencer Soper wrote an interesting article on the topic in Fortune Magazine; Amazon, Killer of Bookstores, Now is Closing all its Retail Book Locations. A more hostile approach was taken by Alex Shepard in the New Republic, Good Riddance to Amazon’s Terrible Bookstores. A bit of a harsh take if you ask me and I am a former bookstore guy. I worked my way through school in the early 1990s at an amazing chain, Rizzoli Books. By the way, mall-based bookstores (remember Walden Books, B. Dalton, etc.?) weren’t killed by Amazon. They were killed by big-box power center players (Borders, Barnes & Noble). By the way, Barnes & Noble is going to open roughly 35 new stores this year… for most of the last decade, they were averaging between 10 and 15 closures a year.
Regardless, Amazon is closing those stores to focus on grocery and other concepts. Interestingly enough, Albertsons reportedly is considering selling off some of its banners. Could something happen here? Maybe, though Amazon growth has tended to be homegrown and organic as opposed to via acquisitions but we are living in interesting times so who knows.
See you next week.