Too soon to party?
Market report
CIO view
This last week in markets centred around the release of the latest data on US inflation. Those calling the bottom in stock markets found more of what they were looking for here – evidence that inflation has finally peaked, meaning that less hostile central bankers may not be far behind...
However, some caution remains appropriate. Inflation remains a mysterious phenomenon, one that is extremely difficult to capture accurately in real (or any) time. We can take some longer term reassurance from William Nordhaus’s famous paper which did find sizeable measurement error in historic inflation data, but that it remained constant over time.[1] Even so, the decimal place in much inflation data should be ignored and single data points de-emphasised.
For our part, there is enough in the data and news flow to suggest that the inflation threat is not done with yet. As our colleagues at the Barclays Investment Bank have been pointing out, the latest readings from three separate US wage series in the last few weeks argue in the other direction. (See chart). We do see the central bankers as ultimately having sufficient fire power to re-tame inflation. However, those sounding the all-clear should remember both that this remains an elusive and powerful foe and the central bankers are armed with very blunt tools.
The positioning of our short-term package of investment positions – the TAA – currently tilts negative in deference. There are paths ahead where inflation cools quickly, and the world avoids recession in the year ahead. However, in terms of likelihood, we suspect that the potential darker paths, where inflation isn’t so easily beaten, have been too quickly de-emphasised in market pricing in the last few weeks.
The long-term investor remains in an envious position relative to the central bankers of the world. Such an investor can take solace in global diversification and future returns reliably tethered to human ingenuity. Jolting news headlines are mostly to be serenely ignored, a function of the need to sell news rather than provide an accurate reflection of the trajectory of the world that affects the diversified investment portfolio or fund.
领英推荐
Chinese policymakers have much to contend with too. The struggle to extinguish the latest waves of Covid-19 joins an increasingly precarious property market and some related societal ripples. Comparisons with Japan’s property bubble that inflated over the 1990s abound, and certainly there are some striking similarities. However, the role of the state in these two Asian economies separated by time is very different. To that end, we would lean against the prophesies of imminent doom that have long circled China in some corners. The fact that the communist party still sits at the commanding heights of the economy is potentially decisive. Nonetheless, just as those who only see a repeat of Japan’s slump are likely wide of the mark, so are those cheerleaders who confidently extrapolate the last few decades of phenomenal success deep into the future.
The policy toolkit that dragged the Chinese economy back up towards the global top table will likely not be of much use for the next stage of development. Combine that with the fact that this jump from poor or middle-income country to rich one has been managed by only a handful of economies in the post-war period. Those looking for a nice clean development recipe amidst the clutch that ascended in the post-war period will likely be disappointed. Korea and Taiwan appear to demonstrate the role of a state-led industrial policy at the right moment. However, even in countries proximate to China, the cultural contexts are different, perhaps importantly so. Many looking at Europe and the US’s early success in the transition to modern economic growth have emphasised the role of specific aspects of culture as discussed in prior articles.[2]
Humility remains the most appropriate setting in amongst all of this. The noisier and more strident the commentator/investor, the less you should trust (mostly) him. Keep in mind that the real theme of the expertly constructed multi asset class funds and portfolios we offer is profit from humanity's collective ingenuity and genius. As we have pointed out before, times of turbulence have sometimes historically provided sparks for further leaps forward. Perhaps that will be the case this time - there is form with information revolutions.
There are gloomier paths of course and even the brighter one's will contain turbulence, shocks and more besides. That is why we devote so much time to thinking about and implementing diversification in our multi asset class funds and portfolios. We want your precious savings to be invested with a broad range of potential futures in mind, even if the north star in our long term asset allocation is future human progress. That productivity hoovering juggernaut called the Strategic Asset Allocation is only part of it of course, we have specialist teams zeroed in on finding extra pieces of investment reward from different parts of the world's capital markets.
[2] Mokyr, J (2017) A culture of Growth: The Origins of the Modern Economy, Princeton University Press, Princeton
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*This article is for information purposes only. It is not intended as a product offer or investment advice
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2 年Excellent job with the Thanos staging, his giant guard dachshunds really add to his economic gravitas !