Avoiding Erdoganomics
The suggestion that high rates are driving inflation shows how reluctant analysts are to accept a new reality
One gets used to the strange logic that Wall Street uses to explain why stocks should always be going up and interest rates should always be going down. Even so, I was taken aback this week to see a JPMorgan analyst on Bloomberg claiming that high interest rates are actually driving inflation. He argued that higher debt costs are responsible for rising prices, from rent to insurance.
This isn’t the first time I’ve heard this idea, but it was still a surprise to see it on mainstream financial television. Ultimately, it is the flavour of monetary policy favoured by Turkey’s Recep Tayyip Erdogan, which has left his country in such a robust economic position, with wellcontrolled inflation of 68.5% in March and a currency that has retained a solid 7% of its value against the dollar over the past decade. Even Erdogan is tiring of it, having allowed the central bank to begin raising rates, to 50% currently.
To be fair, the drivers of inflation are more complex that some economists suggest, and the idea that simply hiking rates will bring inflation down in all circumstances is too simple. When price rises are driven by a supply shock, it’s better to bring on new capacity to meet demand rather than crush the economy to reduce demand – and yes, if rates are too high, investment might be choked off. Still, the idea that monetary policy is tight by anything other than the extremely lax standards of the past decade is frankly a bit silly.
The world before ZIRP
The reason why this kind of thinking is interesting is not because central banks are going to embrace Erdoganomics. I give them very little credit, but not that little. Instead, it points to the difficulty that analysts are having accepting that the environment may have changed. If there is more sustained inflationary pressure in the economy after the pandemic – and consequently a bias towards rates staying higher – it will take a long time to acknowledge that.
We can put that down partly to a lack of market memory. Within MoneyWeek, we often talk about how narrow the focus has become compared with a decade or so ago. The vast majority of investors’ attention is on one of two things: technology and the prospect for rate cuts. Coverage of everything from commodities to mid caps to emerging markets has shrunk greatly.
Take commodities. Investors are aware that crude oil has ticked up in recent weeks on the back of fears about the Middle East. Gold’s recent records earned some headlines. But surprisingly little has been said about copper, which is back to a 15-month high, or strength in other commodities. We are not talking runaway inflation here, just the potential for an upward bias due to a decade of low investment in new capacity, supply disruptions, geopolitical tensions, and demand for metals such as copper in the electrification of energy infrastructure. Miners are perking up: the VanEck Global Mining ETF (LSE: GIGB) is up 20% since its late February lows. This is no bull market yet, but it bears watching at a time when the consensus has been that inflation will settle down.