Short term peak:
by Nathan Warters
March 11, 2022
Gasoline prices are skyrocketing, inflation is soaring, and the stock market has seen “more swings lately than an urban playground.” These are the words of Peter Atwater ’83, assistant professor of economics at William & Mary and founder of Financial Insights, who is an expert in real-time decision-making based on trust.
W&M News sat down with Atwater to discuss these recent economic trends and ask what we should expect down the road.
The following interview has been edited for length and clarity.
Inflation figures are worrying, with February’s rate hitting 7.9%, a 40-year high. What is driving these numbers up like this and how long should we expect this trend to continue?
We see a significant increase, especially in crude energy prices since the spring of 2020, when crude oil prices were actually negative. With fears of the pandemic skyrocketing, there was oversupply. The price increase is a function of several things. First, an abundance of an economic rebound that I don’t think people were expecting. And what that’s caused is what economists call a bullwhip effect where supply and demand get out of sync, and so this process of trying to get supply in sync with demand has been difficult, and you see that with things like supply chain shortages where there is more demand than supply. The invasion of Ukraine has made this situation worse, as Ukraine is a key supplier of foodstuffs, especially wheat, and Russia is a major oil supplier. invasion. I don’t think anything we’ve seen recently should have come as a surprise.
Gas prices are currently exploding, which is explained by many factors, including the war in Ukraine. How much higher can these prices be? What is your level of concern for the future?
In the very short term, we have seen a strong price spike this week which has started to subside. Investor sentiment has become so extreme that you have seen this almost vertical price surge, which usually marks the peak of commodity prices. Commodity price peaks are very similar to stock market troughs. It’s those moments of capitulation where everyone wants in, in the case of commodities, just as they want to get out of equities at the bottom. So, I expect that in the very near term, we will see a continued decline in energy prices – and food prices, for that matter, as these have followed a similar price spike. The price spike for things like nickel got so bad that they eventually had to stop marketing them. So all of this suggests that there is currently a near-term price decline.
You commented on extremely low confidence leading to impulsiveness in the American public. Would you say we are in an extremely low confidence band? And is that what leads to these disturbing economic developments?
I think that contributes to the trends we see. Even before the invasion of Ukraine, consumer confidence was at its lowest in decades. The last time consumer confidence was this low was October 2011 when you saw things like Occupy Wall Street. There is a social tension that exists today that also predated the Ukrainian invasion, which only compounds our impulsiveness.
The stock market has been very volatile. One day it’s down; one day is great. What do these trends say?
They say volatile people create volatile markets. That people are nervous, and so it’s an environment where people act before they think. They are not strategic. They are very focused on the very immediate. And it’s a consistent behavior when trust is low. When we are threatened, we focus on what is right in front of us.
What do the numbers say about the direction of the global supply chain crisis?
The problem with the supply chain of goods in the United States is easing. It’s back to normal. That said, the challenge for other parts of the world is that the supply chain, especially energy, is getting complicated right now. It becomes very difficult to move energy from a place where there is capacity to a place where there is an intense need, so getting liquid natural gas to, for example, Europe is a real problem. Extracting crude oil from the Black Sea is a problem.
I think the last two years have shown that we’ve become complacent about what I would call the global FedEx economy, where we think we can get whatever we want from anywhere in the world anytime and anywhere. What the pandemic and now Ukraine show is that all of these things may exist somewhere, but that doesn’t mean they exist for me today. This creates problems because it leads us to hoarding. In much the same way as when there was no toilet paper, Clorox wipes and bottled water when the pandemic hit, you see companies and even nations now thinking about what to store. And this hoarding behavior, this feeling of scarcity, only exacerbates the inflationary pressure and the scarcity that already exists. So we’re compounding the problem in our response.
What other issues should we be wary of right now? Are there things happening around the corner that the American public should be aware of?
We have just ended an era when investors were looking for abstraction, possibility, especially futuristic possibility. And history suggests that these eras are then marked by a dramatic return of the pendulum towards intensely concrete things. That our preferences range from the distant future, global if not intergalactic, to the almost hyper local. You saw it in the 1970s when commodities suddenly became objects of power. Having now militarized financial markets, I think we need to be particularly aware of the potential for this to be reflected in the militarization of real assets and commodities – which nations and organizations that own physical commodities are likely to try to capitalize on these moments, just as OPEC and other groups did in the 1970s. This pendulum swing has the potential to impose enormous financial hardship on consumers. We are already feeling some of that at the pump. We could see the same thing in terms of increased pressure on food prices. Of the many things that concern me today, it is this militarization of basic commodities – essential food and energy supplies – that worries me most.