Steno's Signals: What the Red Sea Crisis Means for Inflation
Feb 11, 2024
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Crypto expert Andreas Steno Larsen analyzes the risk factors for rising inflation due to the Red Sea crisis and increasing freight rates. They discuss the implications of attacks on ships, potential large-scale attacks, and the failures of US reassurance. They also explore the impact of the crisis on inflation, retail spending, and financial markets.
The crisis in the Red Sea, fueled by the Houthi militia's attacks on ships, disrupts shipping routes and increases freight rates, potentially leading to higher consumer inflation.
The divergence in inflation and demand between the US and Europe favors US equities but not US Treasuries, highlighting the need for a combination of US equities and European fixed income for investment strategies.
Deep dives
The Houthis and the Red Sea Troubles
The podcast discusses the troubles in the Red Sea and the role of the Houthi militia. The Houthis, a clan-based militia in Yemen, control parts of the country and have close ties to Iran. They have been attacking ships in the Red Sea, fueled by Iranian support and domestic popularity in Yemen. These attacks have caused disruptions in the Swiss canal, leading to a decrease in shipping and a rerouting of container ships. The podcast also mentions the possibility of the Houthis targeting tankers in the Strait of Hormuz but concludes that such a scenario is unlikely. The situation in the Red Sea has global implications for freight rates, shipping routes, and inflation, with increasing costs impacting consumer prices.
Impact on Shipping and Global Trade
The podcast highlights the impact of the Red Sea troubles on global shipping and trade. The disruptions in the Swiss canal and the Panama Canal contribute to fewer crossings and delays in shipping. Container ships are being rerouted, causing traffic jams at ports and affecting freight rates. The situation is expected to last for several months, leading to potential supply chain bottlenecks and higher shipping costs. This has implications for the shipment of global goods, including Christmas presents, and may result in increased consumer inflation. The podcast emphasizes the need for a solution to the Red Sea crisis to restore normal shipping operations.
Divergence Between US and Europe in Inflation and Demand
The podcast discusses the divergence in inflation and demand between the US and Europe. The US economy is experiencing a boost in demand due to cost-of-living adjustments and tax brackets, leading to increased consumer spending power. Retail sales in the US are strong, while European countries lack similar automatic spending increases. This divergence is likely to contribute to a consumer goods inflation spike in the US, while Europe remains in an economic abyss. The podcast suggests that this divergence favors US equities but not US Treasuries, and recommends a combination of US equities and European fixed income for investment strategies. The podcast also highlights the US federal government's increasing deficit and its potential impact on future administrations and economic policies.
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Andreas Steno Larsen returns for Education Month to break down the risk factors for rising inflation as the crisis in the Red Sea worsens and freight rates increase sharply.
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