Pre-market stocks: Here’s another troubling reason why inflation will be hard to beat
One of the many buzzwords circulating around Davos this week is ‘fragmentation’, the force that economists have warned could have ‘devastating human consequences’.
By “fragmentation,” they refer to a break from the kind of free-wheeling, cross-border trade and investment that has defined the global economic order for the past three decades. It’s a form of de-globalization — the rebuilding of fences around national or regional fiefdoms.
“The fragmentation is the feeling that maybe we have economies that are protecting themselves a bit more at the national level, and that could slow things down,” Josh Lipsky, director of the GeoEconomics Center at the Atlantic Council, told me. “And then it can make things more expensive in return.”
This is not a new issue, of course – supply chain disruption was accelerated by the onset of the pandemic more than two years ago – but the war in Ukraine, growing political divisions and disputes Persistent trading rekindles concerns of a return to an era of isolation.
“The choices of businesses and governments are set to lead to further fragmentation of the global economy and unprecedented shifts in supply chains, creating a perfect storm of volatility and uncertainty,” wrote a group of experts. chief economists interviewed by the World Economic Forum. “These schemes are expected to create further trade-offs and difficult choices for decision makers, and – without further coordination – shocking human costs.”
Before the Davos crowd had a chance to hit their first happy hour of the week, the world got a glimpse of the micro-fragments unfolding in real time.
Chinese ride-sharing giant Didi, curtailing its once-grand global ambitions, has officially delisted its shares from the NYSE.
- Starbucks withdrew from Russia, after McDonald’s last week, continuing the mass exodus of companies because of the war in Ukraine.
- Russia’s foreign minister said the West had taken a “dictator position” and that Moscow needed to strengthen its ties with China.
- Airbnb said it would pull all listings in China, citing “expensive and complex” operating constraints related to Covid-19 lockdowns.
- Malaysia has moved to restrict chicken exports to its neighbours, saying “the government’s priority is our own people”.
Economists rightly worry about a return to East-West polarized patterns of trade and production. The shortage of infant formula in the United States is a public health crisis that illustrates the danger of over-reliance on domestic production for essential goods. And while globalization has its drawbacks, it has tripled the size of the world economy and lifted 1.3 billion people out of extreme poverty, according to the International Monetary Fund.
Huawei, the Chinese telecommunications giant, is another stark example of how political polarities have contributed to fragmentation, says Xiaomeng Lu, director of geotechnology at Eurasia Group. “There is definitely a trust issue for Chinese and American companies…You can also see Microsoft slowly reducing its practices in China as well.”
Step back: Fragmentation isn’t just about commerce. It is also a question of finance and the supremacy of the American dollar.
“Given the punitive measures the West has taken against Russia, there is serious discussion in some economies, including China, about reducing dependence on the dollar,” Lipsky told me.
The West has become accustomed to dollar dominance and investors should bear in mind that a change is afoot. The dollar still makes the world go round, on networks like SWIFT which are under Western control, but digital currencies could eventually offer an alternative.
To be clear: this will not happen overnight.
“These supply chains were built over 30 years, so you can’t move them to another country,” Lipsky says. “Come back to Davos in 10 years and see how different the global economic system is. This does not mean that there is no desire for change, but doing so is much more complicated.
Here’s Julia Horowitz, senior editor of Before the Bell, with a dispatch from Davos, Switzerland, where she’s reporting on the World Economic Forum.
Old friends and acquaintances catch up in the hallways and on the street. There are handshakes, pats on the back, demands for children and spouses. Many haven’t traveled for work in years, giving the event the air of a happy reunion.
But the invasion of Ukraine by Russia undeniably harms the atmosphere.
“Davos is about shaping a better future. This is what we should be talking about here today. Instead, we need to talk about the cost and consequences of Putin’s war of choice,” European Commission President Ursula von der Leyen said in a keynote address to attendees.
She criticized Russia’s militarization of its energy supply and warned of a looming food crisis as Russian troops block crucial grain shipments from leaving the country, saying Moscow is “using hunger and grain to exercise his power”.
“World wheat prices are skyrocketing, and it is fragile countries and vulnerable populations who are suffering the most,” von der Leyen said.
Business leaders, meanwhile, speak of the state of the world with less bravado, acknowledging that right now there are a lot of things they can’t control.
Alan Jope, the CEO of Unilever, told me after a panel on sustainability that while he is “confident in the underlying performance” of the consumer goods giant, inflation is making his life “more difficult “.
He said he was “concerned about the burden that inflation will place on people around the world – particularly people across the socio-economic spectrum who are least able to withstand the inflationary pressures that are being felt”.
Unilever, which makes Ben & Jerry’s ice cream and Dove soap, raised prices 8% last quarter and said it should continue to raise prices “thoughtfully” to account for the rising cost agricultural products and fuel.
On the radar: Unilever investor Terry Smith made waves earlier this year when he criticized the company’s public focus on its ‘sustainability credentials’, which he said , was made “to the detriment of the concentration on the fundamentals of the company”.
“A company that feels it needs to define the purpose of Hellmann’s Mayonnaise has, in our view, clearly lost track,” Smith said.
Jope told me that investors like Smith are “entitled to their own opinions”, but the “overwhelming majority sentiment” is that Unilever should stay the course. “I understand Terry’s frustration at this point, but I don’t think that’s the majority opinion of our investor base,” Jope said.
Snapchat’s parent company drags tech stocks lower on Tuesday after Monday’s modest rally. What is happening?
Late Monday, Snap Inc. issued a surprise warning in a regulatory filing, saying the “macroeconomic environment has deteriorated further and faster than expected” over the past month. The social media company cut its quarterly forecast, triggering an after-hours sell-off.
Snap shares were down around 30% in premarket trading, dragging the entire industry down with it. Facebook’s parent company Meta fell 7%, while Pinterest fell 11%. Alphabet fell 3.6% and Amazon fell 2.2%. Unsurprisingly, the tech-heavy Nasdaq Composite fell nearly 2% after ending Monday up 1.6%.
In a memo to staff, Snap chief executive Evan Spiegel said the company would slow down hiring for this year and laid out a broad list of issues.
“Like many businesses, we continue to face rising inflation and interest rates, supply chain shortages and labor disruptions, platform policy changes, impact of the war in Ukraine, and more,” he wrote.
The big concern now seems to be advertising – something Snap, Facebook, Twitter and others rely heavily on, and often the first thing to be phased out when budget managers start looking for areas to cut.
“Investors are bracing for another rollercoaster ride,” with Monday’s gains expected to be largely erased by Snap’s downbeat valuation, wrote Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown.
It looks like Monday’s tech rally could prove fleeting, much like the images Snap built its name on.