Gas prices are soaring, inflation is spiking and the stock market has had “more swings lately than a city playground.” Those are the words of Peter Atwater ’83, adjunct professor of economics at William & Mary and founder of Financial Insyghts, who is an expert in confidence-driven decision-making in real time.
W&M News caught up 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.
Q: Inflation numbers have been concerning, with the rate for February spiking to 7.9%, a 40-year high. What is causing these numbers to spike like this and how long should we expect to see this trend continue?
A: We’ve been seeing a significant increase, particularly in crude energy prices since spring of 2020 when crude oil prices were actually negative. With fears of the pandemic soaring, there was oversupply. Rising prices are a function of several things. One, an abundance in an economic rebound that I don’t think people expected. And what that’s caused is what economists refer to as a bullwhip effect where supply and demand get out of sync with each other, and so this process of trying to sync up supply with demand has been difficult, and you see that with things like the supply chain shortages where there is more demand than there is supply. The invasion into Ukraine has compounded that because Ukraine is a critical supplier of food commodities, particularly wheat, and Russia is a major supplier of oil, and so investors particularly have reached for commodities as a way to hedge the uncertainty that they see arising from the invasion. I don’t think any of what we’ve seen recently should have been a surprise.
Q: Gas prices are through the roof right now, which can be explained by many factors, including the war in Ukraine. How much higher can these prices get? What is your worry level for the future?
A: On a very short-term basis, we saw a major spike this week in prices that has started to abate. Investor sentiment became so extreme that you saw this almost vertical drive in prices, which typically marks the peak in commodity prices. Commodity price peaks look a lot like stock market bottoms. They’re these capitulation moments where everybody wants in, in the case of commodities, just like they want out of stocks at the bottom. So, I would expect in the very short term, we should see some continued decline in energy prices – and food prices, for that matter, because those followed a similar price spike. The price spike in things like nickel got so severe that they ultimately had to stop trading it. So all of those suggest there’s a near-term decline in price now afoot.
Q: You have commented on extremely low confidence leading to impulsivity from the American public. Would you say we’re in a band of extremely low confidence? And is that what’s leading to these worrisome economic developments?
A: I think it’s contributing to the trends that we’re seeing. Even before the invasion in Ukraine, consumer confidence was at decades-low levels. The last time consumer confidence was this low was October 2011, where you saw things like Occupy Wall Street. There’s a social tension that exists today that also preceded the Ukrainian invasion, which only compounds our impulsivity.
Q: The stock market has been very volatile. One day it’s down; one day it’s up big. What are these trends saying?
A: They’re saying that volatile people make volatile markets. That people are on edge, and so it’s an environment where people are acting before they think. They’re not being strategic. They’re very focused on the very immediate. And that’s a consistent behavior when confidence is low. When we’re under threat, we focus on what’s right in front of us.
Q: What are the numbers saying about the direction of the global supply chain crisis?
A: The problem with the U.S. supply chain of goods is abating. That’s coming back to normal. That said, the challenge for other parts of the world is the supply chain, particularly energy, is getting complicated right now. It’s getting very difficult to move energy from where there is capacity to where there’s intense need, so getting liquid natural gas to, for example, Europe is a real problem. Getting crude oil out of the Black Sea is a problem.
I think the last two years have shown that we became complacent around what I would call the “FedEx global economy,” where we believe we could get anything we wanted from anywhere in the world at any time on a moment’s notice. What the pandemic and now Ukraine are showing is that all these things may exist somewhere, but that doesn’t mean they exist for me today. That creates problems because it leads us to hording. In the same way that when there wasn’t toilet paper, Clorox wipes and bottled water as the pandemic hit, you’re seeing corporations and even nations now thinking about what they need to stockpile. And that stockpiling behavior, that sense of scarcity, only exacerbates the inflationary pressure and the scarcity that already exists. So we’re compounding the problem in our response to it.
Q: What other issues should we be wary of right now? Are there things coming around the corner that the American public should know about?
A: We have just ended an era where investors craved abstraction, possibility, particularly futuristic possibility. And history suggests that those eras are then marked by a dramatic pendulum swing back to things that are intensely concrete. That our preferences go from way in the future, global if not intergalactic, to almost hyper local. You saw this in the 1970s, where suddenly commodities became objects of power. Having now weaponized financial markets, I think we need to be especially cognizant of the potential for that to be mirrored by the weaponization of real assets and commodities – that nations and organizations that have possession of physical commodities are likely to try to capitalize on these moments, much like OPEC and other groups did during the 1970s. That pendulum swing has the potential to impose enormous financial pain on consumers. We’re feeling some of that already at the pump. We may see the same in terms of more pressure in food prices. Of the many things that trouble me today, it’s that weaponization of commodities – critical food and energy supplies – that worries me the most.
Nathan Warters, Communications Specialist