We have made it through another week, in one piece, I hope. With the gradual easing of lockdown restrictions, it feels as if things are beginning to change. But do not worry, there is always one constant in your life; welcome to this week’s News, Views and Truths.
When that phrase is uttered, the vast majority of us know what it alludes to. Fear. The gradual, imperceptible descent into madness. The sudden shock; realising that what you thought was normal, is now far from it. And it’s coming to get you.
Whether it’s someone suddenly chopping down your bathroom door with a great big axe, or someone entering your bathroom with a knife, while you shower. Those horror movie tropes of the seemingly normal become something deadly, without any warning, are classics.
That can happen in the world of investing. And my bet is that this is inevitable.
The silent killer. A name to strike fear in the hearts of many. The government used this term to great effect in the eighties during an awareness campaign on the danger of carbon monoxide. I am using this term now to raise awareness of a killer of wealth. Inflation.
The chart above is from Statista.com and shows historical UK inflation rates since 1984. As a point of note, the Office of National Statistics has recently updated the April 2020 Consumer Prices Index (CPI) rate of inflation and that now stands at 0.8%. This particular fall was down to lower energy costs due, in part, to the fall in oil prices.
And while many are focussing upon the hope for economic recovery post-pandemic, there are some of us who are looking a bit further ahead.
As I have written many, many, many times before, the market and the economy do not tend to walk in lockstep. Today, this has never been truer.
Whilst US equity markets hit all-time highs, the global economy is under more pressure than in its history. I am not going to go over this again; if you need a recap, go and have a read of the last few week’s articles and you will quickly get up to speed.
Taken from Yardeni.com (if you like your economic data, you will love it there), the chart below shows the issue that, I believe, many are ignoring, wilfully or otherwise.
Central Bank balance sheets are getting out of control. Further to this and announced only yesterday, the European Central Bank has agreed to inject an additional €600bn (£539.5bn) of emergency financial support into the Eurozone economy in order to stave off the bloc’s deepest economic recession in history. It is not slowing down.
I am not saying that this is wrong; it is inevitable that Central Banks would increase their balance sheets to provide much-needed liquidity to economies that are frankly teetering on the brink. However, as I often state to my colleagues, every action has an equal and opposite reaction.
And my suggestion is that eventually, this action will result in inflation.
Many investment advisers, including myself, have never managed portfolios in a period of high inflation. Many investment advisers have never managed portfolios in a world where Central Banks did not stimulate the market directly through mass fiscal intervention.
Yet the levels of intervention currently seen are unpresidential and as such, my conclusion is that the premise of inflation should play a central part in investors’ portfolios moving forward.
The combination of huge levels of fiscal spending, combined with a reversal of globalisation as the post-pandemic world moves to national supply chains as opposed to the current international focus, will, in my eyes, create a breeding ground for inflationary forces.
The Central Banks may ignore this for a time; with UK inflation at 0.8%, that is some way off the Treasury’s target of 2%pa. But just like the silent killer of the movies, inflation will creep up and the only way out of this is to increase interest rates. And that maybe the crux of the issue. We saw in Q4 2018 what happened when Central Banks increased interest rates. At the time, the US Federal Reserve felt that the economy could handle a “normalisation” of interest rates due to its perceived robustness. The equity market believed otherwise and sold off sharply, reversing that when the fed capitulated and promised to reduced interest rates.
So, if the Central Banks need to increase interest rates due to rising inflation, will they? What is the bigger threat, rising prices or Wall Street? Tune in to find out…
This week’s “When Andrew Met…” video is now live on the website and focuses upon UK Mid Cap stocks with Merian’s Richard Watts. For me, Richard is the biggest name in UK Mid Cap investing and is always great value to listen to; you can watch this here.
And, don’t forget, this blog is now available within a podcast which can be found HERE! Not only do you get to hear the words straight from the horse’s mouth, but this week we have a discussion regarding the week’s news with Joe Capaldi, Investment Manager from Charlotte Square in Edinburgh. We also have a weekly cocktail recipe for the weekend; this week it is the Lemon Drop. Don’t miss out!
As always, to finish, we have our usual playlist. Stay safe, stay sane and I will see you all next week.
The content of the above blog is for information purposes only and does not constitute advice. If you do not understand any of the content, we would recommend that you seek professional advice.