Equities seem to be in the throes of the death of a thousand cuts at the moment. The rebound towards the end of January, from the initial swoon, was reversed last week, and at this point a new low is all but certain. There are a number of things troubling equities. Geopolitics are a fickle catalyst for anything, but it has certainly added to the misery in the past few weeks. A Russian incursion in Ukraine remains a distinct risk, an event which would force markets to discount the risk of a more sustained military conflict on the European continent, not to mention a further leap in energy prices. The latter would intensify inflation fears, which are already weighing on markets in the context of the surge in bond yields, and the significant repricing in expectations for monetary policy, for both rates and QE. Investors could do with relief from these headwinds, but I doubt they’ll get it, at least not in Q1.
Read MoreFinancial markets have a tendency to gravitate towards the same narratives over and over, a bit like a good script writer who knows, obviously, that the hero always has to save the cat in the first scene. Core and headline Inflation have soared, and the Fed, as the perennial first mover among the major central banks—curiously flanked by its trusty squire the BOE—is now determined to kill it with rate hikes and QT, having recently abandoned all hope it being ‘transitory’. Cue new scene, and we are witnessing a torrent of forecasters tripping over each other to proclaim that they now think the federales will lift the Fed funds rate by five, six, or even seven, times this year, not to mention shrink its balance sheet by $1T. Markets have been blissfully ignoring the threat of monetary policy tightening, until now. As I type global equities are down 5-to-10% month-to-date in January, and the yield curve is flatter. What comes next?
Read MoreI’ve recently added a new chapter to my long-running demographics journal, which I will present in more detail later this month. Before I get to that, I thought that I would have a look at my own financial performance in 2021. In preview, I did ok, but not as well as the market. My portfolio, split across two accounts at AJ Bell and Nordea, returned 6.6% in 2021, when adjusted for a significant zero-return cash position, and around 10% on its own. I am embarrassed to say that I dropped the ball on the month-to-date PnL calculations throughout the year to a larger extent than usual, so these numbers are a bit a uncertain. They are, in any case, far from the show-stopping returns of the MSCI World equity, index at just over 21%, let alone the performance of the mighty S&P 500, at 27%. My first two charts plot the top and bottom 10 performers, which is as good a basis as any to talk about markets.
Read MoreThe more I think about the current debate about inflation, the more I am inclined towards the following remarkable conclusion. We currently do not have a good framework to explain inflation, neither cyclically nor structurally. Perhaps more appropriately, the old consensus among economists and policymakers on what inflation is, how it arises, and what to do about it has been severely challenged, if not shattered entirely. In a post-pandemic world of a clear, and almost textbook, inflationary mismatch between demand and supply, this has created the odd situation in which everyone is talking about inflation, and more recently inflation expectations, concluding that it either doesn’t matter or that we don’t understand how inflation works in the first place. Nowhere is this clearer than in the debate about whether presently high inflation is transitory or not. The thrust of this discussion has as much to do with the main interlocutors convincing each other that high inflation doesn’t matter, as it is about agreeing on what, in fact, transitory means.
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