Occasionally the Morning Porridge strikes a lucky insight on markets – this morning here are some thoughts on how 2022 markets and events may or may not develop. If they occur I shall hail myself an investment genius. If not, can we quietly forget them?
Inflation is the market’s theme today. Markets expect it, but are they prepared? Inflation doesn’t necessarily spell disaster, but it will force change in the way we think about markets – and Tech will likely be the sector that feels it most!
Let me present a list of things to worry about next year. Inflation, US and China growth, Stagflation, Central Banks, Stocks, Climate and Equality, etc, etc.. But the big risks will be the consequences of US Politics and a Liquidity Meltdown in the Credit Markets.
Forget everything you think you know about inflation. It is not solely a consequence of “monetary phenomena”, but largely about the behaviour of crowds. That’s why it’s so dangerous to growth and markets.
Jay Powell keeps his job and faces the inflation quandary – hiking rates too soon risks recovery, but inflation needs addressed. The likelihood is lower rates for longer – which will juice euphoric markets further. What’s the alternative? Stop buying financial assets and buy the real economy!
Despite Global uncertainty, rising inflation, and potential slowdown, markets remain Euphoric. All irrational markets eventually pop. How much longer can the current market mood be sustained? Longer than we think…
The biggest risk to markets have always been policy mistakes by central banks and/or governments. The risks are rising as confusions about inflation abound. The reality is Central banks have tripped themselves – by assuring us inflation was transitory, they’ve pretty much nailed on its permanence!
Fraxious markets as stocks wobble, fears rise, energy prices spike; what’s to worry about? Preparing for inflation would be one thing – but being ready for opportunity is another!
The risks of Central Bank policy mistakes are escalating. Fixed Income markets are wising up to the potential of long-term stagflation/inflation. A bond correction will crush stock markets if/when real interest rates turn positive. Central Bankers will need to decide: intervene to save markets – continuing the current distortions, or let loose the dogs of market meltdown. Anyone for the last few choc-ices?
