The Far East should help us with supply chains and inflation
We all know that supply chains have been disrupted around the world, hindered massively by the Far East and China’s zero tolerance to Covid-19 across many regions. As the biggest trading bloc in the world, this was bound to have a severe impact, however, the surprise has been that restrictions have gone on so long.
So, now the Far East is coming back into the fold we have an interesting dilemma. In some ways, global productivity will improve, which by definition could be deemed to be inflationary, but the easing of supply chains should bring prices down.
Most western economies, as Gus reported last week, now seem intent on harming their economies in the quest to arrest inflation whereas in the Far East, the authorities will no doubt be seeking to stimulate their economies and regain their competitive advantage. Very strange times.
Inflation is complex
Oil prices have abated in the last month or so, but this doesn’t appear to have been passed onto the consumer here in the UK. Food prices are now rising more quickly than oil and gas – and house price inflation is only just slowing.
Central banks have been much criticised for letting inflation gain a foot hold late last year but with the Far East causing supply issues and the expectation that restrictions would be lifted, coupled with the invasion of Ukraine creating all manner of issues around a wide range of commodities, no wonder inflation is soaring.
On my return, it is interesting to hear that in many quarters there is an expectation that inflation will begin to peak in the next few months. There are already signs of this, as we have mentioned with the oil price and the UK property market. The problem now is that the aggressive action in raising interest rates so quickly and with the rising costs for businesses and consumers, we could cascade into a recession. What is often referred to as a ‘hard landing’.
If we cast our minds back two years, central banks and governments of developed nations were hell bent on creating inflation and were committed to aggressive stimulus. How quickly things have changed! Now they have withdrawn stimulus, have too much inflation and are doing what they can to arrest inflation whilst at the same time harming their economies.
Finding natural buoyancy
I used an analogy this week to someone when talking about economic conditions and particularly the markets, using the context of throwing on object into a body of water (assuming it floats). Immediately it plunges which I likened to the onset of Covid-19 and then we have the opposite force as the object surges upwards which I conveyed as being stimulus. Then gravity brings down the object once more before it finds its natural buoyancy.
This, I believe, is what is happening to markets and once it recovers from these extreme forces, we’ll have less of this ‘shock and awe’ and a semblance of normal service will resume. The problem, of course, is that we don’t know for how long this will go on but there are signs that inflation is likely to peak in late summer/ early autumn in some quarters.
A market analyst at City Index and Forex.com, Fawad Razaqzada, was quoted in Bloomberg this week when he said, “the biggest worry right now is stagflation. That is where the global economy is headed, traders believe, and central banks won’t be able to do much about it. If they fasten their belts too tightly, this will hit GDP, while if they loosen their belts again, this will only fuel inflationary pressures further”.
In the same publication the Chief Investment Officer at North-Western Mutual Wealth Management, Brent Schutte, stated, “the market certainly is volatile right now. We’re going to go back and forth between these recession fears and these inflation fears. But I think over the next year, anyone who is invested in equities now is going to be happy.” Something we strongly resonate with but the question on most people’s minds is how bad will it get before a recovery?
A devastating six months!
In general, despite a bit more volatility, we finished 2021 in good fettle. Portfolios were in positive territory, and we were all looking forward to escaping the clutches of Covid-19 and its variants. The sword of inflation was hanging over us though as central banks, notably the UK, began to increase interest rates. Inflationary pressures were ramping up and then we had the invasion of Ukraine!
Today, the 1st July, marks the start of the second half of the year and of course the journalists are busy commenting on what an awful six months we’ve just had. No escaping this, as it has been awful.
We are being overwhelmed with superlatives though.
“US stocks had the worst first half since 1970”
“European stocks have had the worst sell off since 2008.”
We know why, but this was summarised in Bloomberg this week:
- Why: Runaway inflation, the invasion of Ukraine, fears of recession and hawkish central banks have all sparked a flight from risk assets
- Lookahead: Market strategists expect the Stoxx 600 to rebound in the second half and end the year only 4% lower than 2021.
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