Back in February 2020, just as Covid was beginning to be felt across the world, we wrote – only half convincing even ourselves – that it wasn’t the disease itself that would really hurt the financial markets of the world, but the disease’s impact on the ’just in time’ global supply chain. Our ‘Ring O Ring of Roses’ letter from Feb 2020 is, dare we say it, worth a recap.

Today then – with supply chains disrupted, energy prices spiraling, and consumer demand diverted from travel and leisure to roofing tiles, cars, and fast-food deliveries – we are experiencing the inflation and the disruptions we worried about. Financial markets are beginning to react.

So far markets have wobbled just a little. Inflation is still seen as transitory. We expect the backlogs that Covid-19 has caused will be cleared. That the 13m NHS backlog can be cleared by more money. That the 40% jump in criminal cases awaiting trial can be cleared by more money. And that the kids’ loss of a year’s education can be cleared by harder work from the teachers, longer hours for the kids and of course more money. We are running at full pace but failing to catch up. Over 1m job vacancies in the UK sounds great but is it just a symptom of an economy running on empty.

It is becoming increasingly obvious – certainly in Britain where Brexit has added icing to the cake – that perhaps we may never catch up. It is not so much the canary in the coalmine, more like the Dead Parrot from the Monty Python sketch. Resuscitation by the central banks, through the printing of more and more money each time the economy lurches is struggling to bring this patient back into normal rhythm. The economy’s heartbeat is becoming increasingly erratic.

So, what if we can’t catch up?

The short answer is that perhaps we get a depression or stagflation? The difference? Put simply is that a depression is a recession when prices fall while stagflation is a recession when prices rise. Technologies that are already here will help us out in the medium term by making us much more productive but in the short-term adjustment is needed.

So, markets look to be hitting a speed bump. How hard that bump will be will differ from country to country, sector to sector. MVAM are positioning portfolios for the acceptance that we can’t catch up. We are bracing the portfolios. Government spending has enabled us to keep our heads in the clouds. Job growth and wage growth are skyrocketing. That’s good for the underpaid and underappreciated workers of the world. Well at least for now. Wages are set to take more of the economic pie and corporate earnings less of it. About time it could be argued, indeed it is difficult to argue against that.  But that means for asset prices it is time to brace yourselves…we are coming into land.

Kind Regards
Craig Harper
Mole Valley Asset Management