Aurelia Butler

I’m not often glad I am no longer the young person in the room. This month I am. If you have only been knocking around in markets for, say, 15 years, you are seeing the collapse of everything that you have been told is true and have also observed to be true about markets. It turns out that quality growth stocks do not always outperform; that the Federal Reserve will not always step in to protect your wealth; that ESG investing is not an automatic road to win-win riches; and that the prices of the growth stocks in your portfolio have long been more a function of loose monetary policy than the priceless nature of innovative thinking. Finally, it turns out that the idea of sticking with a long-term portfolio consisting of 60 per cent equities and 40 per cent bonds does not mean everything will always be fine. This year so far you would have lost much the same on money in the iShares 20+ Treasury bond ETF as in the S&P 500 — about 18 per cent in both. Shorter dated bonds would have lost you less, but look down a list of bond funds in the UK and you will be hard pushed to find one down less than 7 per cent. Global funds don’t look too good either. The Vanguard Global Corporate Bond Index is down over 12 per cent year to date, making its performance not so different from that of the MSCI World Index, down 13 per cent. So much for the genius of asset class diversification. The problem here is obvious. The protection you are supposed to get from bonds involves their yields falling (and hence prices rising) in the bad times. That makes sense. Mostly when things look tricky in equity markets there is a reason (or central banks at least manage to find one) to cut interest rates to sort things out. The only time this can’t happen is when inflation is already obviously out of control — and no amount of fretting about market crashes and looming recessions can allow central banks to even begin to look like they aren’t fully focused on having a go (however fruitless it may be) at bringing it back under control. So here we are — in what Andrew Lapthorne, Société Générale’s head of quantitative equity research, calls the “unusual” position of seeing equity and bond markets imploding at the same time: between them they have lost some $23tn of value since their peak last year.That’s a lot of losses. So what next? The answer is all about inflation. Some think it isn’t far off peaking in the UK and the US. They might be right. In the UK, for example, there were a good few one-offs in the numbers — the 54 per cent rise in the energy price cap, hospitality VAT going back up to 20 per cent and a sharp rise in the price of fuel. But even if CPI numbers jump to 10 per cent (from last month’s 9 per cent) and then start to fall back, it is highly unlikely they will return to central bank target levels (mostly 2 per cent for reasons that are lost in the sands of time) or, for that matter, anywhere near them. After 30 years of the annual rate of UK inflation mostly hanging around 2 per cent, this is something very few people yet concede as a possibility, let alone a likelihood. But it is — and the reasons for that are not exactly secret. Globalisation is deflationary — the lowest cost producers supply everyone. Deglobalisation is not — and with China and Russia disengaging from the global economy, this is what we have. The energy transition is also expensive, both in its requirements for materials and metals and in the way enthusiasm for it has slashed the enthusiasm for supporting fossil fuels. The 11 biggest oil companies in the west invested a mere $100bn last year, notes Argonaut’s Barry Norris (he has made a great little YouTube video on all this). That might sound like lots of money but it is not. Less than a decade ago they were investing $250bn a year. That failure to invest brings with it supply constraints that are not going away in a hurry. Last year, western oil companies found new oil and gas reserves equivalent to just 4 per cent of global demand — a new low. And of course it means higher prices.

There is an argument that these inflationary impulses — and the huge economic turning points causing them are nothing in the face of another giant global dynamic — our ageing population. As people age, we are told, they shift from being accumulators to being replacers and their consumption falls accordingly. This is so deeply deflationary that it is not possible for inflation to settle into western economies (see Japan). I’ve never quite bought this. It doesn’t fit with the behaviour of the retired people I see around me — and it turns out it doesn’t fit with the behaviour of the average retired person either. A new report from the Institute for Fiscal Studies suggests that on average retirees’ total household spending does not fall. It remains pretty constant, actually rising slightly at all ages up to 80 and only falling slightly after that. It is also worth noting that our ageing population doesn’t exactly help with our labour shortage. The deflationary impulse from ageing populations many assume is inevitable? It may not exist. And if it does not, there is really nothing left to prevent inflation staying much higher than we are all used to for many years to come.

All this is leaving investors a little paralysed. You can’t trust bonds (this will be the case as long as rates are rising not falling). You can’t trust cash (anything on deposit is losing you 7 per cent or more in real terms at the moment). And you can’t trust the kinds of equities that you relied on for the last decade: the stocks Yardeni Research refers to as the MegaCap-8 (Amazon, Alphabet, Apple, Meta, Microsoft, Netflix, Nvidia and Tesla) are down an average of 28 per cent since January. The only good news is that while all this feels new (and is new to most market participants) it is not actually new. Much of it mirrors the conditions of the 1970s — another time in which everything seemed to change at once. Everything is not completely the same — but there is enough that is, to be worth checking on the few things that then made people richer not poorer. With that in mind, hold gold. Hold things that are seeing their prices rise from supply crunches, such as fossil fuels and commodities. And absolutely crucially, expect volatility — and regular recession scares. There was a lot of that about in the 1970s — and there is going to be a lot of it about in the rest of the 2020s.Merryn Somerset Webb is editor-in-chief of MoneyWeek. The views expressed are personal. She has holdings in gold and shares in Shell More

BENGALURU (Reuters) – The U.S. Federal Reserve will lift interest rates higher by the end of this year than anticipated just a month ago, keeping alive already-significant risks of a recession, a Reuters poll of economists found. While U.S. inflation, running at a four-decade high, may have peaked in March, the Fed’s 2% target is still far out of reach as disruptions to global supply chains continue to keep price rises elevated.The May 12-18 Reuters poll showed a near-unanimous set of forecasts for a 50-basis-point hike in the fed funds rate, currently set at 0.75%-1.00%, at the June policy meeting following a similar move earlier this month. One forecaster anticipated a hike of 75 basis points.The Fed is expected to hike by another 50 basis points in July, according to 54 of 89 economists, before slowing to 25- basis-point hikes for the remaining meetings this year. But 18 respondents predicted another half-percentage-point rise in September too. A majority of poll respondents now expect the fed funds rate to be at 2.50%-2.75% or higher by the end of 2022, six months earlier than predicted in the previous poll, and roughly in line with market expectations for a year-end rate of 2.75%-3.00%.That would bring it above the “neutral” level that neither stimulates nor restricts activity, estimated at around 2.4%.”The pressing goal is to bring policy rates to neutral, before stepping back to judge the impact,” Sal Guatieri, senior economist at BMO, wrote in a note.”The Fed can only hope that inflation pressure stemming from high commodity prices and the pandemic’s impact on labor and material supplies will reverse soon.” Graphic – Reuters Poll-US monetary policy outlook: https://fingfx.thomsonreuters.com/gfx/polling/egvbkwmydpq/Reuters%20Poll-US%20monetary%20policy%20outlook.png Fed Chair Jerome Powell on Tuesday reiterated that the U.S. central bank would ratchet up interest rates as high as needed, possibly above the neutral level. Nearly 75% of respondents to an additional question in the poll – 29 of 40 – said the Fed’s rate hike path was more likely to be faster over the coming months than slower. Inflation, as measured by the Consumer Price Index (CPI), was forecast to average 7.1% this year, and remain above the central bank’s target until 2024 at least.The New York Fed’s latest global supply chain pressure gauge rose in April after four months of declines, suggesting those price pressures remain very much alive, as did a recent Reuters analysis.Meanwhile the poll showed a median 40% probability of a U.S. recession over the next two years, with a one-in-four chance of that happening in the coming year. Those probabilities were steady compared with the last survey.What hasn’t remained steady is sentiment in financial markets. The Standard & Poor’s 500 equities index appears to be on the cusp of a bear market, down close to 20% from its peak near the start of the year.The U.S. economy, which contracted for the first time since 2020 in the January-March period, was expected to rebound to an annualized growth rate of 2.9% in the second quarter. But forecasts were in a significantly wide range of 1.0%-6.9%.GDP growth was predicted to average 2.8% this year before moderating to only 2.1% and 1.9% in 2023 and 2024, respectively, down from the 3.3%, 2.2% and 2.0% predicted last month. Graphic: Reuters Poll – U.S. economy and Federal Reserve rate outlook – https://fingfx.thomsonreuters.com/gfx/polling/akvezraoxpr/Reuters%20Poll%20-%20U.S.%20economy%20and%20Federal%20Reserve%20rate%20outlook.PNG Forecasts for the unemployment rate remained optimistic, averaging 3.5% this year and next, before picking up to 3.7% in 2024.But more than 80% of respondents to an additional question – 28 of 34 – said that over the coming two years it was more likely that unemployment would be higher than they currently expected than lower.”The only realistic way to break the wage-price spiral is to push up the unemployment rate. If the Fed does not do this by accident, they will have to do it by design,” said Philip Marey, senior U.S. strategist at Rabobank. “A recession is the inevitable outcome.”(For other stories from the Reuters global economic poll:) More

This risk applied particularly to the most vulnerable economies, said Okamura, without naming them.Asian economies faced a choice between supporting growth with more stimulus and withdrawing it to stabilise debt and inflation, he said.While Bank of Japan policy runs counter to a global shift towards monetary tightening, central banks in the United States, Britain and Australia raised interest rates recently.Okamura, a former Japanese vice finance minister for international affairs, also said the COVID-19 pandemic, the war in Ukraine and tighter global financial conditions would make this year “challenging” for Asia.The war was affecting Asia through higher commodity prices and slower growth in Europe, he said.Speaking at his first media event since becoming one of four deputy managing directors at the global lender last year, Okamura warned on the prospect of even more forceful tightening if inflation expectations kept on “drifting”.”There is a risk that drifting inflation expectations could require an even more forceful tightening,” he said.Okamura called for calibrated policies and clear communication. More

TOKYO (Reuters) – Japan’s core consumer inflation in April rose above the central bank’s 2% target, hitting a more than seven-year high as increases in energy and commodity costs are causing broader price hikes that are pressuring households.The rise in consumer prices is making it harder for the Bank of Japan (BOJ) to convince markets it will keep monetary policy ultra-loose and as the gains fuel public concerns about pushing up living costs.The nationwide core consumer price index (CPI), which excludes volatile fresh food costs but includes those of energy, surged 2.1% in April from a year earlier, government data showed on Friday.That marked the fastest rise in a single month since March 2015 and matched the median forecast in a Reuters poll.The gain was much stronger than a 0.8% year-on-year rise in March, as the impact of mobile phone fee cuts from April last year that have pulled down overall CPI since then starts to fade from yearly comparisons.The overall rate of price increases in Japan has remained modest compared with much sharper rises in the United States and other advanced economies, as sluggish wage growth in the world’s third-largest economy makes it harder for firms to raise prices.The BOJ has retained its massive monetary stimulus as it seeks to have inflation stably reach 2% on the back of strong wage growth, even as a weaker yen pushes up food and energy prices and other major central banks are tightening policy. More

UK consumer confidence has dropped to its lowest level for nearly 50 years amid the cost of living crisis, according to a survey, fuelling concerns that the economy will slide into recession in 2022. The UK consumer confidence index fell 2 percentage points to minus 40 in May, its lowest since records began in 1974, said research company GfK in a report published on Friday. The survey measures how people view the state of their personal finances and wider economic prospects. Joe Staton, client strategy director at GfK, said: “Consumer confidence is now weaker than in the darkest days of the global banking crisis, the impact of Brexit on the economy, or the Covid shutdown.”The fall in confidence reflected soaring inflation, which reached a 40-year high of 9 per cent in April driven by rising energy prices following Russia’s invasion of Ukraine. Linda Ellett, UK head of consumer markets at KPMG, said that “as prices and rates rise, the ability of consumers to spend is falling”. Throughout last year, consumer spending supported the UK’s pandemic recovery but record-low consumer confidence has raised the risk of recession, defined as two consecutive quarters of falling output. Samuel Tombs, economist at Pantheon Macroeconomics, noted that when the GfK consumer confidence index had in the past fallen below minus 30, “households’ spending dropped” and “recession ensued”. The UK’s economic recovery had already stalled in February and March and the Bank of England expects the economy to alternate between near-stagnation and contraction over the next two years with economic output unlikely to change significantly before the first quarter of 2024.The fall in consumer confidence is the first sign that the UK economy is experiencing a protracted period of economic stagnation coupled with historically high inflation, a combination usually referred to as stagflation. The UK has not experienced a combination of such diverging trends in prices and activity since the 1970s.Sandra Horsfield, economist at Investec, said that despite household savings building up over the pandemic, a squeeze on discretionary spending looked “inevitable”. She added this was especially true for poorer households, which have fewer savings and tend to allocate a larger share of income to food and energy.The GfK data, based on interviews conducted in the first half of May, showed that the proportion of people choosing not to make big purchase decisions rose, as confidence levels fell more than the minus 39 forecast by economists polled by Reuters. Perceptions of personal finances and the wider economy also deteriorated.Waning consumer confidence was reflected across several sectors. Shopping and recreational outings were down 11 per cent compared with pre-pandemic levels, according to Google Mobility data.

In the second week of May, credit and debit card spending on discretionary items, such as clothing and furniture, was down 14 per cent from pre-pandemic levels, according to BoE data. A survey by the Office for National Statistics showed that in the first half of May more than half of the respondents had cut their non-essential spending and energy use as a result of rising living costs. Early in the week, official data showed that UK unemployment fell to the lowest rate in nearly 50 years and more job vacancies were available than job seekers for the first time on record. The tight labour market adds to the risk of higher and more persistent inflation as rising prices become embedded in wage negotiations and in the wider economy. As a result, markets are pricing the Bank of England to raise rates to 2 per cent by the end of the year from its current 1 per cent. This would mean higher borrowing costs for businesses and households on top of soaring prices. “The outlook for consumer confidence is gloomy and nothing on the economic horizon shows a reason for optimism any time soon,” said Staton of GfK. More