From the editor...
Teachers say that their job is especially gratifying when they can see the penny dropping in a student’s expression, especially if the student in question isn’t the brightest bulb in the chandelier. It can be a similar story in finance. Markets are often a bit slow on the uptake (remember how global stocks made new highs as late as October 2007, when it was obvious that the credit crunch was the pin that would burst the credit bubble).
But in the past few weeks investors seem to have twigged that we have shifted from the era of “lower for longer” to “higher for longer”, a structural backdrop we have been concerned about for some time. Recent moves in the markets reflect the expectation that US inflation and interest rates could stay uncomfortably elevated; US markets set the tone for the rest of the world. Not that they need to at this stage; core inflation (minus volatile food and energy prices) has ticked up across the developed world this year.
The penny drops on Wall Street
Following Wednesday’s unexpectedly strong US inflation figures, markets were pricing in between one and two interestrate reductions of 0.25 percentage points by the US Federal Reserve this year, compared with six in January. And this week the higher-for-longer narrative went mainstream, with JPMorgan’s CEO Jamie Dimon warning in his annual letter to shareholders that he was worried about the scope for stagflation and thought interest rates could rise as far as 8%.
He highlighted structural reasons to expect a more inflationary backdrop in the years ahead: an increase in military conflicts, the rampant spending on going greener and the restructuring of global trade. Meanwhile, higher bond yields and commodity markets (see page 20) are telling a similar tale, while gold and silver are both on the move (see pages 4 and 5).
One reason precious metals are increasingly sought after is snowballing debt. US public debt is currently rising by $1trn every 100 days and is on track to reach $40trn in 2025, double 2017’s $20trn, as investment newsletter The Kobeissi Letter points out. (US GDP is $26trn.) Private debt is also dangerously high, with the US banking system threatened by struggling commercial realstate companies faced with refinancing their borrowings at much higher rate over the next two years (see page 5). This is the sort of systemic risk that central banks, who are the key reason gold keeps hitting new record peaks, want to hedge against, to say nothing of the shaky geopolitical backdrop.
In the meantime, beyond having 10% of your portfolio in gold, continue to concentrate on cheap assets (see page 4) and investment themes with excellent long-term growth prospects, particularly if you can buy into popular ones cheaply (see page 24). You will find further ideas in a series of MoneyWeek podcasts I recently completed. The series, sponsored by IG, comprises interviews with ten fund managers or investment strategists, with topics ranging from how Alliance Trust is a global one-stop shop for your portfolio and Japanese corporate governance reform, to the outlook for Canada and frontier markets. The series is available on Spotify.
Finally, we are launching a new series of Readers’ Choice Awards to help us find the top providers of investing, saving and banking products (see page 27). Please do participate in the survey.
“Markets were slow to realise that the credit crunch was the pin to burst the credit bubble”