May 17, 2022

When big things go bad, it is seldom the result of a single event. The 2008 recession was caused by more than just the banking shenanigans known as “subprime mortgages”. At the same time: The stock market was overvalued (remember the Fed Chair warning of “irrational exuberance”?) and thus ready to crash; inflation was heating-up; and, in response, the Fed had implemented a series of interest rate hikes.

Sorta sounds like 2022, don’t it? Here are the details of what happened back in 2008: 

The Fed rate increases pushed the discount rate to 5.3% (today the Fed rate is at 1.0%). In response, banks increased their mortgage rates, and homeowners who had Adjustable Rate Mortgages saw their monthly payments skyrocket. These “ARMs” had been “sold” to home buyers with initial, artificially low, “subprime”, interest rates.

The rising mortgage rates reduced the number of people who could afford a new mortgage and, with lower demand, housing prices, which had been crazy high, began to fall. When banks foreclosed on homeowners who couldn’t make their payments, they discovered that the outstanding mortgage was more than the house was worth. Banks that held too many bad mortgages began to fail. Higher interest rates (which make bonds more attractive), commercial bankruptcies, and investigations into the subprime shenanigans, all fueled the stock market crash. 

The 2022 recession will likely be called the Ukraine recession and it is coming to a neighborhood near you, and soon. The official announcement will be in early July.

Why July? The definition of a recession is negative GDP growth for two consecutive quarters. America’s GDP was negative for Q1 of 2022 (-1.4%). That surprised the “experts”, who had predicted of continued growth (these are the same “experts” who said inflation would be “transitory”). Unless Uncle Joe cooks the books, Q2, which ends on June 30th, will very likely be negative too. It will take the experts a few days to figure out the spin, so that means the announcement will be in early July. Really, the only questions are: How long the recession will last and how bad will it be?

I think the answers are pretty long and pretty bad. Too much bad stuff is going on, including: Ukraine; supply chain issues; inflation; rising interest rates increasing the payments on our $20 plus Trillion national debt; high gas, diesel, and oil prices (which are not included in the inflation number!); and the COVID housing bubble. 

(During COVID, people from away paid a lot of money for properties in rural areas, driving home prices far higher than their real values.) 

As a result of all the bad stuff, the stock market has turned “bearish” (down over 13% so far this year). This should be a huge red flag, but Uncle Joe seems oblivious. 

Yet, when all is said and done, it may be the fertilizer shortage that hits you the hardest. Yup, fertilizer. Let me be clear: The fertilizer I am talking about is the magic chemical that makes plants grow big and tall, not the BS that spews from Washington. Unfortunately, there is no shortage of political fertilizer. But I digress. Here is the deal.

Historically, half the fertilizer we use in America comes from Russia and Ukraine. That’s not happening this year. And replacing those lost imports in going to be a big problem. 

Fertilizer has three main components: Potassium, Phosphorus and Nitrogen. The numbers on a bag, like “10-10-10”, reflect the concentration of each component. 

Potassium comes from potash rock. The US has ample potash mines in Utah and New Mexico. Despite the efforts of the Clinton’s, Florida still produces massive amounts of phosphorus. So far so good.

But fertilizer gets its third component, and arguably the most important, nitrogen, from ammonium nitrate. And, there is a serious shortage of ammonium nitrate. The reason? It takes a lot of natural gas to make ammonium nitrate and there isn’t enough natural gas available to make electricity (Maine gets half its electricity by burning natural gas.), heat our homes and businesses (For political reasons, the University of Maine recently switched from oil to natural gas.) and still have enough gas left to make fertilizer. 

The reason the demand for natural gas exceeds supply rests entirely with the Biden administration. Entirely. This administration is anti-fracking, anti-drilling, anti-pipelines and anti-fossil fuel. Once again, Uncle Joe seems oblivious, even cancelling a recent oil and gas lease sale. 

Investors have reacted accordingly and taken their money elsewhere, leaving the oil and gas industry with less capital for innovation and expansion. The bearish stock market and rising interest rates have further diminished available capital (the stock market has lost something like $10 TRILLION in value so far this year). Even if Biden reverses course now, it is too late. There is no short-term fix. According to the Energy Information Agency, the scary high gas and oil prices are here to stay – at least thru 2023. And, so is the fertilizer shortage. 

The reason the shelves in the pasta section are half empty is pasta is made from wheat. The reason a decent steak costs $20 is livestock eat corn. Ditto for eggs.

Because of the fertilizer shortage, the farmers that feed America will either cut the acreage they plant or use less fertilizer and get lower yields. Either way, the result will be the same: There will be a smaller harvest. Like with gas and oil, food shortages and higher prices are here to stay. 

Time to plant the garden. If you can’t find any fertilizer, there is plenty of free manure in Augusta. 

Randall Poulton