This week, we examine the unique trends that are likely to have a significant impact on the global economic and geopolitical landscape. First, we discuss how the strength of the US economy is complicating the fight against inflation. Then, we look at the prospects for Latin America, from the region’s greater connectivity to the US to criticisms of its private sector. We then examine the issues that face the commercial real estate sector and the crisis’ global reach. We end this week by investigating how farmers’ movements can wield outsized influence on global politics.

US Economy’s Strength May Complicate the Fed’s 2% Target

A Market Correction Could Be a Stockpickers’ Paradise

Teresa Rivas, Barron’s

Hot Inflation Shows Fed Rate Cuts as Far Away as Ever

Nicholas Jasinski, Barron’s

The Confusingly Strong Economy Told in Three Stories

James Mackintosh, The Wall Street Journal

What is driving the surprising resilience of the US economy? One answer could be private-sector productivity (which has allowed the economy to grow as inflation cools), that has been rising since Q1 of 2022 at the beginning of the Fed’s interest rate hikes. According to this narrative, workers have moved to higher-paid and more productive jobs. However, some believe the rise in productivity was only due to the supply chain issues (brought on by the pandemic) ending, and that the productivity boost would be a one-off event. Another explanation is fiscal spending – the idea that Federal spending – of which the government ran a record peacetime deficit during Covid – provided enough stimulus to keep the economy running. A third answer to the economy’s strength is one of timing – when the Fed began raising rates, many individuals and firms held a lot of debt at locked-in, record-low rates. As time passes and debt needs to be refinanced, the higher rates will start to bite.

Whatever the cause of the strong growth, it does cause problems regarding the Fed’s mandate to lower inflation to 2%, as well as the market’s expectations for rate cuts. The hotter-than-expected 3.1% inflation reading for January sparked a market sell-off and pushed expectations for rate cuts all the way to June, with some even fearing a return to hikes. Fed Chair Powell, adopting a cautious “wait-and-see” approach, emphasized the need for sustained evidence of inflation going down before making any decisions. Overall sentiment reflects the Fed’s cautious approach, suggesting investors might also adopt a similar wait-and-see attitude. At the same time, the S&P 500 is near a record high but may be due for a pause, with some predicting a decline due to this recent volatility. However, this could be a buying opportunity, as the rally has broadened beyond Big Tech and individual stocks are performing more independently. While the broader market might stall, there could be attractive opportunities in non-tech sectors like small- and mid-cap companies. This year might see more diverse winners emerge, rewarding active investors in this time of macroeconomic confusion.

Latin America’s Economic Potential 

Latin America’s private sector is failing the region, economist Mazzucato warns

Michael Stott, Financial Times

Mexico Is America’s Answer to China’s Belt and Road

Howard W. French, Foreign Policy

Recent data indicates that Mexico has surpassed China as the top trade partner of the United States. Some analysts suggest that Mexico’s growing significance in this regard could provide valuable solutions to some of America’s most pressing challenges, which include managing peaceful competition with China, resolving the political turmoil surrounding immigration, and reinvigorating America’s reputation as a positive influence in the 21st century. One specific proposal involves a significant economic initiative that would connect the United States and Latin America, akin to China’s Belt and Road Initiative. This initiative could help alleviate migration pressures, diversify economic ties away from China, and stimulate economic growth and development in Latin America, benefiting both regions.

Mariana Mazzucato, an economist advising several Latin American governments, shares this belief in the economic promise of Latin America. However, she warns of a significant issue in the region’s private sector. According to her, companies are benefiting from government connections without sufficiently investing in research and development. Mazzucato points out that these companies have profited from substantial rents and subsidies, whether through natural resource exploitation, protectionist measures, or nepotism. Instead of favoring specific industries, Mazzucato argues for governments to adopt “mission-oriented” strategies to address particular challenges. She advocates for stronger state involvement, using tools like public subsidies and investment conditions to drive strategic goals, citing Germany’s green steel initiative as an example. Mazzucato rejects the notion that increased government intervention poses a unique risk in Latin America, arguing that corruption is a global issue. Ultimately, she emphasizes the importance of strong state leadership and increased public and private investment to fully utilize Latin America’s economic potential.

Commercial Real Estate Faces Trouble Around the World

Commercial-Property Loans Coming Due in US Jump to $929 Billion

John Gittelsohn, Bloomberg

Commercial Real Estate’s Slow-Motion Crisis Explained

Jack Sidders, Bloomberg

US Commercial Real Estate Contagion Is Now Moving to Europe

Giulia Morpurgo, Tasos Vossos, & Neil Callanan, Bloomberg

Commercial real estate was once a safe haven for reliable returns in the bygone era of near-zero interest rates. The rise of work-from-home (with vacancy rates for office retail hit record highs in major American cities) and online shopping lowered valuations, making it difficult for property owners to refinance their loans. Many banks that are exposed to commercial real estate have already begun setting billions aside to cover these loans. Nearly $1 trillion of commercial real estate debt is maturing in 2024 (and an estimated $2.2 trillion is due to mature by the end of 2025), potentially sparking a wave of property sales or refinancing. Regional lenders have been hurt the hardest given their overexposure to the sector and their lack of other assets that could cushion the blow. In this predicament, many landlords may be forced to foreclose. Modern office buildings will likely fare better than those that would require billions to bring them up to standard.

European real estate is also showing signs of trouble. In a recent case, Germany’s Deutsche Pfandbriefbank AG saw its bonds fall due to concern about its overexposure to commercial real estate, and it described the current climate to be the “greatest real estate crisis since the financial crisis.” Like the US, it is smaller, property-focused banks that are in the most danger, but analysts believe that these institutions likely have enough capital and aren’t exposed to deposit runs like a pure retail bank would be. Still, experts warn that while the situation doesn’t look good for commercial real estate in the US or Europe, there could still be more pain to come for the sector.

Agriculture Emerges as a Key Battleground During Election Year

Farmers’ Revolt Threatens Election Year Upsets Around the World

Nayla Razzouk, Kim Chipman, Lyubov Pronina, and Pratik Parija, Bloomberg

The agricultural sector has emerged as a focal point in a broader cultural and political battle over money, food, and climate change. Farmers worldwide are protesting against rising costs, bureaucratic hurdles, and the impact of new regulations like the EU’s Green Deal, which they fear will dilute their markets. This discontent is not limited to Europe; farmers in the US and India also face challenges, with Indian farmers recently staging protests in Delhi over crop prices and loan waivers. Politicians, including figures like Donald Trump and far-right groups in Europe, are seeking to harness this anger for their own gain, making agriculture a key issue in upcoming elections globally.

Governments are grappling with how to navigate the transition to more sustainable agriculture while addressing farmers’ concerns. In the EU, recent protests have prompted a reconsideration of some environmental policies, highlighting the tension between green initiatives and agricultural livelihoods. The EU’s Common Agricultural Policy remains a significant source of support, but farmers are wary of policies that may reduce their yields or increase costs. In the US, President Biden’s policies, such as promoting electric vehicles, have sparked criticism from farmers who argue that they are being overlooked in the fight against climate change. Despite the economic importance of farming, farmers feel increasingly marginalized and burdened by regulation, which may lead to even more widespread discontent and political volatility.