Poor in Food, Rich in Bits, 4/8

The stock market ignores supply shocks

Peter Zeihan writes,

Whether due to sanctions, war, boycotts or malinvestment, we stand at the beginning of years-long shortages of the stuff we need to feed the world. We’ll chew through the world’s collective wheat reserves before year’s end, and shortly thereafter tip into deep, chronic food shortages spanning multiple continents.

If Zeihan is right, then the world’s wealth has taken a big hit. And yet, if I look at the U.S. stock market, it is only slightly below its all-time highs. Why?

1. Zeihan could be wrong. Russia and Ukraine are not large as a share of world GDP. Perhaps taking them offline is not as big a deal as he makes it out to be. Perhaps he is exaggerating the significance of the products that Russia and Ukraine used to export. Perhaps he is under-estimating the ability of the market to provide substitutes quickly and at low cost.

2. The suffering that Zeihan predicts will take place. But corporate America will thrive.

3. The stock market will crash at some point.

In the Spring of 2020, we experienced the “COVID shock.” The economy was disrupted by the way that governments and the private sector responded to the virus. A lot of small retail businesses, most notably restaurants, shut down either temporarily or permanently.

When COVID hit, the stock market took a deep dive (much deeper than the decline this year), but it subsequently recovered. Why did it recover? Because we used the Internet as a substitute for activities that were curtailed by COVID. And the Internet services we used were provided by corporations with shares traded on Wall Street. The economy shifted in the direction of bits, and this redistributed profits toward shareholder-owned companies. Zoom and Amazon fed on the carcasses of mom-and-pop businesses, so to speak. So even though overall wealth declined, the share of wealth accounted for by large corporations increased, and this buoyed stock prices.

As with COVID, the Russia-Ukraine war and the responses to that war are disrupting the economy. As I write this, though, the stock market seems to be relatively unconcerned. It is as if speculators are saying, “Corporate America thrived on the virus. It can thrive on the war, too.”

But the economic adaptation to the virus was to substitute bits for other means of getting goods and services. You used Amazon to get stuff delivered to you instead of going to the store to get it. You used Zoom to meet with work colleagues or out-of-town friends and relatives instead of going to the office or engaging in travel.

Instead, Zeihan predicts that the war will result in a scarcity of food. It’s not easy to see how we substitute bits for food. I cannot point to a corporation that is positioned to profit from mass starvation the way that Zoom or Amazon were positioned to profit from social distancing.

I have been bearish on the stock market for a long time. I have been wrong for a long time. But I keep seeing reasons to be bearish. In this instance, the war cuts into global wealth, and that should show up as lower share prices.