— Mar 3, 2022


The key figure which markets are now focussed on is the monthly inflation number in the US.

The most recent print in February was a staggering 7.5%. Given the Fed is still pumping money into the economy and interest rates remain at 0.00%-0.25% this seems crazy. We believe interest rates should be a multiple of where they are now. 

The general view of the Fed and many economists is that they expect inflation to cool sharply later this year.

However, many of them, and indeed market participants, actually have zero experience of such levels of inflation given it was over 40 years since it was last at these heights.

Therefore a whole generation has grown up with no worries about inflation and its insidious effects on people’s wealth and savings.

We, with older heads, were always told that once such inflation becomes embedded in the mind of the general population then it becomes self fulfilling. Wage demands rise to cope with higher bills be they food, energy, services and increased mortgage costs as interest rates rise.

Additionally, the record of the Federal Reserve in taming such inflation without causing a recession is particularly poor. The Fed has NEVER successfully forecast a recession. Indeed Ben Bernanke, the chairman at the time, is famous for dismissing the chance of a housing bust in 2008!

All these inflationary costs will have to be borne by businesses and that will mean reduced spending on advertising and business investment. The canary in the coalmine has always been advertising expenditure, as this is usually the first to get cut.

Though the major indices remain close to their peak levels, the Nasdaq (i.e. the US tech index) is down c15% from its peak. The US and UK small and midcap stocks are enduring a torrid time, with the Russell 2000 in the US down 10.6% and the FTSE Small Cap index in the UK down 8.6% since the beginning of the year. Finally, two of the FANG stocks, Facebook and Netflix have recently warned on profits and in the bond markets bond prices are falling.

Reflecting back on the year following the Covid-19 outbreak in our December 2020 piece we wrote the following:  

We have been able to protect your wealth and assets during the pandemic because of the following:

1) Resilience. We spend far less time trying to predict markets than we do on trying to be resilient whatever the outcome. In order to achieve this we have constructed your portfolio with the following attributes: diversification across asset classes, ample cash buffers, high quality/high liquidity sovereign debt assets and the holding of hedging assets, such as gold. These have all helped to cushion the downside.

2) We were not afraid to act when other investors panicked. We called the bottom on March 18th and invested the models in risk assets (equities & alternatives) that we believe were at fire sale valuations, when many were fleeing or were forced sellers.

As our regular readers and those who have attended the recent briefings will know, these are the exact same steps we are taking now to protect your portfolio.

We cannot say when the full impact of inflation or the next misstep by governments and central banks will occur. What we can do however, is to determine if we are being appropriately compensated for the risk of holding a particular asset.

As things stand today we remain focused on resilience; as and when market conditions change so will our position.