The most destructive rock falls start with a single pebble trigging a cascading chain reaction. Are markets heading towards a cascading crash as spiking energy costs join inflation and supply chains on the list of likely meltdown trigger points? Or should we relax?
As markets shake off their summer slumbers, what should we be worrying about? Lots..! From real vs transitory inflation arguments, the long-term economic consequences of Covid, the future for Central Banking unable to unravel its Gordian knot of monetary experimentation, and the prospects for rising political instability in the US and Europe.
The shocking return of the Taliban dominates the headlines. It has critical implications for markets. Biden’s loss of credibility creates many hurdles and could drive the US towards isolationism – bruised by yet another flawed foreign adventure. Meanwhile, markets struggle with inflation and climate consequences.
Markets have entirely recovered after their wobble earlier this week, but it’s based on a simple belief: central banks will stand behind markets. Investors are increasingly convinced inflation threats are irrelevant – and they are wrong to do so. Inflation risks are growing from immediate climate change, the costs of rising environmental instability and inflation leaching out of financial assets into the real economy.
What Inflation? “Oh, that’s nothing to worry about, the central banks have no choice but to keep juicing markets”… The market is so focused on the short-term and ignoring the consequences of the last 10 years of QE, monetary experimentation and easy rates, that its blundering into the next crisis. Inflation matters, and has jumped from financial assets into the real economy.
There are many very clever investment firms – Baillie Gifford takes a long view to recognise and consider the future and trends, while Bridgewater is taking a view on inflation and rates. But, what if the most important factor likely to drive long-term returns proves to be the destabilising consequences of the last 10-years of interest rate repression and the distortion of rules, regulations and fads? These could prove the “no-see-ems” that tumble markets!
As the US Fed meets to discuss rates and assess the real inflation threat, the UK Covid-freedom delay is likely to stall recovery momentum and add to the economic pain being felt at the micro-level. Markets are pricing for a transitory inflation bloom, but what is the real inflation outlook and what will it mean for bond markets as the European Union launches Europe’s fully mutualised funding programme – don’t anyone tell the Germans its happened!
Money supply economists argue inflation is nailed on, even if Central Banks and Governments taper QE and hold back further fiscal spending binges. But the consequences of the last 12 years of monetary experimentation, the massive inflation in financial asset prices, the changed investment environment, and rising inequality mean the coming crisis really will be different this time. Maybe it’s not inflation we should fear, but its much more evil and thuggish sibling – Stagflation.
Nothing to worry about… except Pandemic, Bonds, Inflation or Deflation, Record Container Prices and Geopolitics? Is there any chance of compromise and a deal on the US infrastructure package everyone agrees is necessary – or will it sink into the partisan swamp? And Cathie Wood talks up her investment strategies – but what’s the substance behind the leading Zeitgeist Investor?
Forget the noise from crashing crypto – the big issue for markets is cutting through the buzz of contradictions to perceive the real picture presented by the threats of: inflation, taper tantrum and price sustainability. This is going to be an “interesting” summer.. (If it ever stops raining…)