Aurelia Butler

It is only a minor exaggeration to say that the 1973 oil shock created the modern global economy. That year the Arab oil producing countries stopped exports to many western countries as punishment for providing aid to Israel during the Yom Kippur war. The embargo helped birth a new energy economy, aiming to reduce dependence on foreign oil. Its effects on inflation, meanwhile, brought the Keynesian era, where central banks sought full employment, to an end. Eventually, the effects would usher in the world of inflation targeting independent central banks.Almost half a century on, the Russian war in Ukraine and the sanctions imposed in retaliation are raising the risk of a new oil shock. While there is, as yet, no embargo of similar scale to the 1970s on Russian oil — the US, which announced an end to imports this week, and the UK, which plans to more gradually phase them out, buy little compared to other countries — global prices have risen over the past couple of years by a similar proportion. The cost of a barrel quadrupled during the 1973-74 embargo. Today, prices have risen at an equivalent pace since their, admittedly pandemic-induced, low in 2020.But oil is much less important to today’s world and Russia less of a dominant producer than the Opec cartel was in the 1970s. The International Energy Agency estimates oil accounts for 32 per cent of total energy generation compared to 48 per cent in 1973 and is mostly used to fuel cars rather than power stations. Natural gas, though, has increased its share of energy supply since 1973 from 16 per cent to 23 per cent, and prices for gas in Europe have risen more than eightfold. Taken together, the rise in the cost of both fuels could have scope to cause a similar “shock” to the world economy.While economists are still debating the exact mix, the inflationary spiral of the 1970s probably had as much to do with the strength of labour and relatively loose monetary policy as with the energy price shock. With markets deregulated and lower rates of unionisation today, workers have less capacity to ensure their wages keep pace with prices. It is true that central banks have, once again, begun to put more focus on increasing employment rather than limiting inflation, but they will hopefully not be as slow to react to the warning signs as they were in the 1970s.The economic outlook is still worrying: while the 1970s tend to be primarily associated with inflation, the rise in unemployment and the recession that accompanied the “oil shock” were equally devastating. Even if the knock-on effect on consumer prices can be contained, sharp drops in real household incomes, and perhaps even a recession, are likely to follow today’s steep increase in fuel costs. Some poorer countries, which export oil or gas, may benefit but many of the very poorest, who rely on imported food and fuel, will suffer. Ultimately, the Arab states’ oil embargo did not work: Israel’s allies remained resolutely committed to the country. Instead, the oil shock of the 1970s encouraged a renewed focus on energy efficiency and bolstered attempts by the west to blunt what became known as “the oil weapon”. President Jimmy Carter urged Americans to put on a sweater and installed solar panels on the White House. The west will undoubtedly feel significant pain in the short term from a new oil shock. But in the longer term it will drive speedier adoption of renewables, the “energy of freedom”, as German finance minister Christian Lindner put it. More

“Since the two sides opened up the door to each other (50 years ago), they should not close it, let alone decouple,” Li said at a press conference after the close of the annual parliament meeting. In 1972, then-U.S. President Richard Nixon landed in Beijing in a historic visit to China that opened the door to diplomatic relations between the two countries. However, bilateral ties have worsened in recent years with China and the United States clashing over issues of trade, human rights, Hong Kong, Taiwan and the COVID-19 pandemic. Li said it was unavoidable for the two countries to have differences as they are different in terms of their social governance, history and development phase. “However, we believe cooperation should be the mainstream because world peace and development are dependent on that. Even if we are market competitors in economic and trade fronts, that should be benign and equal.”Li said there was room for bilateral trade to expand if Washington loosened export controls against China. More

Those of us who remember the 1970s, even as children, are getting nervous. No decade is all bad. But very few of us would like a repeat of the inflation, the endless financial stress, the poverty — and in the case of many families (mine included) the migration in search of work. Unfortunately, so far the 2020s are feeling rather too much like the 1970s for comfort. Dario Perkins of research group TS Lombard lists the ways. The 1960s saw one of the longest expansions on record. It also saw a flattening of the Phillips curve — that is, falling unemployment was not correlating with rising inflation in the way one might expect. That emboldened policymakers to both prioritise full employment over low inflation (inflation did not appear to be the relevant risk) and to develop more activist fiscal policy. This was the backdrop to a fabulous bull market. The FTSE All-Share index doubled in the two years to January 1969, when it peaked on a record price/earnings ratio of 23 times.

Then came a huge energy shock which built on previous inflationary rumblings. The Phillips curve normalised, wages started rising and the money supply surged. Policymakers blamed temporary factors — and stripped them out of the inflation numbers they used as their reference point. It was “transitory”, you see. It sounds horribly familiar, doesn’t it? Particularly now that, notwithstanding Thursday’s sharp fall in the oil price, the energy price shock of the past few weeks is of 1970s-style magnitude. Perkins is not convinced that we need to get as tense as I am beginning to feel. There is, he says, a huge and crucial difference between now and then, in the UK at least. Then, labour had power. Now it does not. Our population is not so young and “militant”, our trade unions are weak, our markets are much more open (companies can’t get away with price rises in the same way) and pretty much no one — pensioners and MPs aside — has their income in any way indexed to inflation. All that means that a wage price spiral can’t get going in quite the same way. He might be right. I’d argue that workers will rebuild their bargaining power pretty quickly in the face of CPI inflation hitting 10 per cent. It is worth remembering that in the 1960s pay lagged behind inflation for some time before pressures appeared. There were murmurs in 1966 from the railways and the coal mines and things then took a turn for the seriously worse in late 1969 when Ford Motor workers went out on strike. Still, whichever of us is more right — forecasters are rarely completely right — one thing is for sure. We won’t be going back to the 2010s. The deflation machine that has been the driving force of the past few decades is properly broken, something that is fast turning out to be a terrible shock to fund managers who have only ever worked inside said machine, and so have hard-wired into their behaviour an assumption that moderate inflation and low interest rates would last for ever. With globalisation reversing, labour costs at best no longer falling and the structural supply problem with materials and energy increasingly obvious, prices of pretty much everything must now rise. A reminder for those who think there is an easy way out: you need fossil fuels to make wind turbine blades and solar panels and you need a lot of nickel — up 90 per cent in two weeks — to make electric car batteries. The question is just how much prices must rise, how fast and with how much volatility. That we can’t know. The war in Ukraine gives us some unpleasant clues about the short term (up a lot, very fast and with a lot of volatility) but the overlay of uncertainty means we can’t guess much more than that. Who knows, for example, what might result from attempts by money-printing governments to protect households from the sharply rising food prices caused by the horrors in one of the world’s most reliable producers of grain?

So where are the financial safe havens? You might think that as long as inflation stays in the 1 to 4 per cent region (Perkins’ guess) you’ll be safe in equities. That’s what we are often told. But it isn’t always so. UK inflation only tipped over 5 per cent in 1969 but investors still lost out hugely in the 1960s: the market went up 20 per cent and prices went up 43 per cent. Extend it into the stagflationary 1970s and things look pretty bad too. From October 1964 to May 1979, a period which encompasses two Labour governments and one Conservative, UK stock market investors lost 31.7 per cent of their money in inflation-adjusted terms. So much for the idea that an equity index can protect you from inflation, stagflation — or indeed anything else. The good news is that the one way an equity market can protect you is if you buy it at the bottom — the best long-term returns come from buying cheap markets. It would be nice to think some markets are nearly there, particularly the US, which is at less risk of war-related recession than Europe. They aren’t. For that, we would need to be sure there was another wave of central bank money on the way, to know that energy prices are on the way down and to be sure that valuations are compelling. None of these things are true, or anywhere near to being true. For example, the Shiller price/earnings ratio for the US is still over 30 times against a long-term average of more like 16 times. Waiting for them to be true is a slow process. Russell Napier, a market historian, likes to point out that the four great bear markets in the US lasted on average nine years each. In the intervening period, you should get some protection from commodities and from gold — you did in the 1970s. But you would also be wise to look at multi-asset funds run by managers who have long known that the deflationary machine would break and who are invested accordingly. Look at Ruffer Investment Company, which is up a little in the year to date, Personal Assets Trust and Capital Gearing Trust. They are more ready than most.Merryn Somerset Webb is editor-in-chief of MoneyWeek. The views expressed are personal; [email protected]; Twitter: @MerrynSW. She has holdings in Ruffer Investment Company, Personal Assets Trust, Capital Gearing Trust, gold and commodities More

Investors offloaded global bond funds for the ninth week in a row, amounting $15.75 billion, which was 32% higher than in the previous week. Graphic: Fund flows: Global equities bonds and money market: https://fingfx.thomsonreuters.com/gfx/mkt/gdpzybgdevw/Fund%20flows-%20Global%20equities%20bonds%20and%20money%20market.jpg Brent crude oil jumped this week to a 14-year high as U.S. President Joe Biden’s announcement of a ban on Russian oil and energy imports on Tuesday raised further concerns over surging crude prices.However, crude prices eased later in the week, after the United Arab Emirates pledged to boost oil supply and it became clear the European Union would not join the United States and Britain in banning Russian oil. [O/R]European bond funds suffered net selling of $8.2 billion, while U.S. funds and Asian bond funds witnessed outflows of $7.85 billion and $0.35 billion respectively.Global high yield and, short- and medium-term bond funds posted outflows of $5.07 billion and $4.44 billion respectively.However, government bond funds obtained $1.29 billion, while inflation-linked funds received $1.94 billion in inflows, a two-fold jump in purchases over the previous week. Graphic: Global bond fund flows in the week ended March 9: https://fingfx.thomsonreuters.com/gfx/mkt/akpezxlmkvr/Global%20bond%20fund%20flows%20in%20the%20week%20ended%20March%209.jpg Meanwhile, investors disposed of global equity funds worth a net $9.22 billion in a second straight week of net selling, although outflows were 18% lower than the previous week, Refinitiv Lipper data showed.Financial sector funds faced net selling of over $3 billion for a second successive week. However, mining and energy sector equity funds received inflows worth $1.1 billion and $0.88 billion respectively. Graphic: Fund flows: Global equity sector funds: https://fingfx.thomsonreuters.com/gfx/mkt/jnpweboxopw/Fund%20flows-%20Global%20equity%20sector%20%20funds.jpg Global money market funds received inflows worth $3.06 billion, underscoring investor caution during the week.Among commodity funds, the demand for precious metal funds jumped to a six-week high as they obtained $1.67 billion in net buying, while, energy funds received $1.3 million.An analysis of 24,111 emerging market funds showed equity funds had outflows worth $2.49 billion, while bond funds witnessed net selling for a fifth successive week, worth $1.03 billion. Graphic: Fund flows: EM equities and bonds: https://fingfx.thomsonreuters.com/gfx/mkt/zgvomzdkxvd/Fund%20flows-%20EM%20equities%20and%20bonds.jpg More

Argentina’s congress has voted in favour of a deal to restructure $45bn in debt with the IMF from its record 2018 bailout, days before a deadline to repay $2.8bn to the Washington-based lender from the country’s fast-dwindling reserves.After 12 hours of debate the leftwing Peronist government secured a simple majority in the early hours on Friday, with 202 of 257 votes in support of a 30-month extended fund facility arrangement outlined this month. “It is important to have this solution to avoid a catastrophe,” said Sergio Massa, president of the lower house, ahead of the session. The Argentine economy is in dire straits. Annual inflation is running at more than 50 per cent, pressure on the local exchange rate is building and dollar reserves are perilously low. By some calculations net central bank reserves have already fallen into negative territory. Argentina’s 22nd deal with the IMF since it joined in 1956 is now subject to approval from the fund’s board as well as the country’s senate, which is expected to vote early next week. ​​​Street protests against the IMF deal turned violent outside congress in the capital Buenos Aires on Thursday as the session opened. Demonstrators set fire to rubbish containers and threw stones at the building. Police were called to control crowds. President Alberto Fernández had been struggling to convince a fractious parliament to approve the IMF deal, which restructures money lent under a record-breaking $57bn bailout in 2018 signed by the previous centre-right government of Mauricio Macri.

Members of the opposition bloc and some critical voices within the ruling coalition got behind the deal this week after ministers agreed to drop a clause stating that congress would support government economic policy. The government’s win removes the threat of an imminent default on $19bn of repayments due to the fund this year, but investors are sceptical that a divided and unpopular administration facing elections in 2023 can keep the new arrangement on track and deliver on the conditions set out. Fernando Sedano, an economist at Morgan Stanley, described the IMF programme that will delay debt repayments to 2026 as “soft” and “non-transformative” in a client note, saying the plan delivered no structural reforms to foster investment and long-term growth. Buenos Aires has agreed to gradually reduce the budget deficit over three years and curb central bank money-printing in exchange for a four-and-a-half-year grace period on IMF payments. The government has already agreed a separate restructuring with private bondholders.One of the main disagreements with officials in Washington during months of inconclusive talks had been over how quickly to withdraw big subsidies on electricity and gas prices. Argentina will reduce energy subsidies by a planned 0.6 per cent of gross domestic product this year, something that analysts warn is unrealistic given the surge in global fuel prices. Once the IMF board gives the green light — which is widely expected — the country is due to receive $9.8bn of funds. Additional amounts are subject to passing quarterly revisions by IMF staff.Argentina has been cut off from most external finance since defaulting on its foreign debt for a ninth time in 2020. More

LVIV, Ukraine (Reuters) – Russian forces bearing down on Kyiv are regrouping northwest of the Ukrainian capital, satellite pictures showed, in what Britain said could be preparation for an assault on the city within days.Ukraine accused Russian forces of hitting a psychiatric hospital near its eastern town of Izyum on Friday, in what the regional governor called “a brutal attack on civilians”. Emergency services said no one was hurt as the patients were already sheltering in the basement.Reuters could not immediately verify the report and there was no immediate comment from Moscow.Russia has been pounding Ukraine’s cities while its main attack force north of Kyiv has been stalled on roads since the invasion’s early days, having failed in what Western countries say was an initial plan for a lightning assault on the capital. Images released by private U.S. satellite firm Maxar showed armoured units manoeuvring in and through towns close to an airport on Kyiv’s northwest outskirts, site of intense fighting since Russia landed paratroops there in the first hours of the war.Other elements had repositioned near the small settlement of Lubyanka just to the north, with towed artillery howitzers in firing positions, Maxar said.”Russia is likely seeking to reset and re-posture its forces for renewed offensive activity in the coming days,” Britain’s Ministry of Defence said in an intelligence update. “This will probably include operations against the capital Kyiv.”The British update said Russian ground forces were still making only limited progress, hampered by persistent logistical issues and Ukrainian resistance.Ukraine said Russian forces were regrouping after taking heavy losses. In its overnight statement on the battlefield situation, the Ukrainian general staff also said its forces had pushed Russians back to “unfavourable positions” in the Polyskiy district, an area near the Belarus border to the rear of the main Russian column heading towards Kyiv.Oleh Synegubov, governor of the Kharkiv region, said 330 people had been at the psychiatric hospital when it was hit: “This is a war crime against civilians, genocide against the Ukrainian nation,” he wrote on the Telegram messaging app.The reported strike came less than two days after Russia bombed a maternity hospital in the besieged southern port of Mariupol, an attack Washington has called a war crime. Ukraine said pregnant women were among those hurt there; Russia said the hospital was no longer functioning and was occupied by Ukrainian fighters when it was hit.For a seventh straight day, Russia announced plans to cease fire to let civilians leave Mariupol, site of Ukraine’s worst humanitarian emergency, with hundreds of thousands of people trapped with no food, water, heat or power. All previous attempts to reach the city have failed with both sides accusing each other of failing to observe ceasefires.Ukraine said it would try yet again to help people leave: “We hope it will work today,” Deputy Prime Minister Iryna Vereshchuk said.Moscow denies it has been targeting civilians in what it calls a “special operation” to disarm and “de-Nazify” Ukraine.PUTIN SEES ‘POSITIVE SHIFTS’President Vladimir Putin has tried to project an air of calm in regular engagements since ordering the invasion on Feb. 24. In the latest, a meeting with Belarus leader Alexander Lukashenko, Putin said there were “certain positive shifts” in talks with Ukrainians. He gave no further details.Earlier, at a meeting of his security council, Putin approved a proposal to recruit 16,000 fighters from the Middle East.”If you see that there are these people who want of their own accord – not for money – to come to help the people living in Donbass, then we need to give them what they want and help them get to the conflict zone,” Putin said. The Kremlin threatened to shut down Facebook (NASDAQ:FB) owner Meta Platforms in Russia on Friday, following a Reuters report that the company had issued guidelines temporarily easing a ban on calls for political violence to allow some Facebook or Instagram posts that encourage killing invading Russian troops.According to internal emails sent to content moderators, the guidelines would even allow posts that call for the death of Putin or Lukashenko.”We don’t want to believe the Reuters report – it is just too difficult to believe,” Kremlin spokesman Dmitry Peskov told reporters. “We hope it is not true because if it is true then it will mean that there will have to be the most decisive measures to end the activities of this company.”European Union leaders were holding a summit at France’s Versailles Palace, expected to be dominated by calls for more action to punish Russia, assist Ukraine and cope with an influx of nearly 2.5 million refugees in just two weeks.In the two weeks since the invasion, Western countries have swiftly moved to isolate Russia from world trade and the global financial system to an extent never before visited on such a large economy.In the latest move, sources said U.S. President Joe Biden will ask the Group of Seven industrialised countries and the EU to strip Russia of normal trade rights, known as “most favoured nation status”. That would allow hitting Russian goods with new tariffs.While Russia’s advance on Kyiv has been stalled and it has failed so far to capture any cities in northern or eastern Ukraine, it has made more substantial progress in the south. Moscow said on Friday its separatist allies in the southeast had captured the town of Volnovakha north of Mariupol.On Friday, three air strikes in the central city of Dnipro killed at least one person, state emergency services said, adding that the strikes were near a kindergarten.Ihor Polishshuk, the mayor of the city of Lutsk, said four pepole were killed and six wounded in an attack on an airfield there, a rare strike on a target deep in western Ukraine and far from the battlefields in the north, east and south. Within Russia, the authorities have banned any reports that refer to the “special operation” as a war or invasion. Most of the remaining independent media outlets were shut last week. Thousands of people have been arrested for holding mostly small anti-war demonstrations. The main opposition figure, Alexei Navalny, issued a call from jail for mass protests on Sunday. More