Hard Labour

Market summary

1.??????Volatile week in capital markets leaves global stocks lower again

2.??????Central bankers continue to talk tough about the prospects for interest rate rises and wider policy normalisation in the year ahead

3.??????Incoming data on the global economy remain supportive of the stingier monetary setting now better incorporated into capital markets pricing (there is less froth about)

CIO view

We again find ourselves at a fascinating juncture. It remains very difficult to discern the underlying health of the global economy from incoming data. Such are the lingering distortions from the Omicron wave and the pandemic, only the fools are confident (as usual you might say). In many economies, demand for workers still outstrips the apparent supply of them by a historic degree. Soaring (nominal) wages are the result. There are many plausible theories as to how this will evolve in coming quarters, all with quite different implications for how central bankers and capital markets will respond.

As we’ve pointed out before, US and UK vacancies are highest among so-called ‘low skill’ occupations, corresponding to where we have seen most action in the ‘great resignation’. Anyone who has waited tables in a busy restaurant, for example, may well rightly baulk at ‘low skill’ label in any case. My days of mismatching orders with tables are thankfully deep in the past, long before the pandemic apparently scrubbed the thin veneer of civilisation from many of the world’s consumers. The point here is again about the potential for more durably changed incentives. Perhaps the compensation required to lure workers to some of these very challenging jobs needs to rise substantially further.

There are other factors at work in the US and UK labour markets. Particular to the US is a ‘she-cession’, with the mixture of prolonged school closures and scarce child services pushing many mothers out of the labour force. The IMF estimate that the “excess employment contraction for mothers of children younger than five years old compared with other women accounted for around 16% of the total US employment gap…” compared to pre-Covid levels. Again, necessity will play a role when and if we reach the promised land of Covid-19 endemicity. However, when and how these women re-enter the labour force (if they do), will again have an important bearing on the outlook for growth and inflation in the world’s most important capitalist economy. With the UK, it is Brexit that is among the extra factors obscuring our view of what we should now consider normal with regards to the size of our labour force.

This may all seem a little academic, something to worry about tomorrow when there appear to be so many things to panic about today. However, this debate on what has really, more permanently, changed about the global economy this last couple of years is actually central to this week’s action. How far and how fast interest rates rise will ultimately be defined by what the world economy can handle. The size, capability, and productivity of the active global workforce is key to setting those parameters.

While we wait for the answers, we will have to endure the procession of talking heads barking over-confident forecasts at us. The background white noise of social media apparently chases this part of the commentariat to ever greater stridency in their grab for precious marketing air. The good news for investors is that the recent market gymnastics leave prices across a range of assets reflecting a much more balanced assessment of the risks, both positive and negative, that lie ahead.

Even so, the setting of interest rates and wider financial conditions remains starkly at odds with the rapidly recovered health of many of the world’s major economies. We may not know where interest rates are going to peak, but we can be sure that they need to rise. There is plenty investors can do to be ready. Keeping an investment foot in some of the dustier areas of the capital markets spectrum is part of it. Until last year, diversified commodities had endured a very forgettable decade. Now they appear an increasingly logical part of a diversified investor toolkit. This year has highlighted that the extra uncertainty that shrouds future demand of many commodities amidst the necessary transition to cleaner energy sources can be a positive. Higher prices may yet be needed to compensate suppliers sufficiently to take on these riskier investments in supplies that we will still need for some time to come.

All told, stay calm is the familiar cry. Unsettled markets tend to force our horizons closer. We are sometimes guilty of listening to those we would usually ignore. Staying power and humility are often the most valuable investor traits at such moments. Stick with a well-diversified mix of investments and remember that whatever the future holds, there is plenty of cause for optimism about our long-term future and the investment returns that come with it. That growing store of explanatory knowledge, the fuel of the productive spurt we’ve seen this last few hundred years, is just getting started with revolutionising our lives.???

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