Summer Update – Déjà vu edition

Hope this update finds you and your loved ones well and you have a nice summer break to look forward to.

Central Bank Error

Since I sent my winter update last year and my further update on the war in Ukraine, I have felt the need to send another on several occasions, but have not done so because I have struggled to think of what has really changed in the background.

Just to recap what I said in my last note:

“Markets are mostly concerned about the rise in the cost of living (inflation) with the US reporting a 6.2% year on year rise for October and our own figure in the UK being 4.2%. In simple terms, this means that if you had £100 in the bank last year it will now only buy £96 worth of stuff. Leaving cash in the bank long term is almost becoming the same as hiding it under the mattress in these days of non- existent interest rates.

Central banks are normally concerned with keeping the rate of inflation low and ideally around 2%. If it drifts over this level there will be pressure on the banks to raise interest rates to counter this. Markets do not like interest rates going up because it impacts the value of bonds, which will generally fall in value. Investors are worried that central banks may increase rates too fast which will trigger market sell offs, referred to as central bank error”.

The war in Ukraine has pushed up the cost of petrol, gas and wheat higher again and we are all feeling the pinch from this. The underlying driver of what is happening in markets since the start of the year is still the hangover from Covid. There are still lots of problems with supply in manufacturing. In simple terms, if there is less of a supply of basic materials but the amount of people wanting to buy it remains the same, the price will have to go up. This is where the worst inflation is coming from. Economies which have shut themselves down due to Covid are now spluttering back to life and China only recently were locking their citizens down again. Inflation will not ease back until this situation is resolved.

As far as the oil price is concerned the west is a victim of its own plans to combat climate change. During previous oil crisis the US were able to fall back on fracking to increase their own supplies and briefly became independent in oil under the last administration. They have it within their grasp to solve the problem, but the trade off will be back tracking on their climate change commitments. We face the same dilemma in the UK. What should Governments do in this situation, answers on a post card…

As I mentioned in the note above, central banks overreacting and raising interest rates will trigger falls in the market. In my mind, we know these problems are largely resulting from supply side issues rather than the economy overheating, so putting up rates seems to be the wrong prescription at the wrong moment. If anything we want to be trying to ‘rev up’ our economies. Some may also point the finger at central banks who were rather profligate in printing money during the Covid crisis. This action in itself will generate more inflation as each new £ printed devalues all the rest in circulation. Ask Zimbabwe and Venezuela where printing money gets you in the long run. Rest assured there was no shortage of paper to use in these countries during the great toilet roll crisis. We are nowhere near those levels but I do believe that powers to print money need to be reformed and are used far to easily these days. Central bankers are under pressure and need to be seen to be doing something though…

I would expect that once these inflation issues start easing off and central banks lay off putting up rates, we should see a recovery in markets. I have had several briefings from our investment manager panels noting that companies are still earning decent money so the recent falls in value are not fully supported by the underlying fundamentals. When positive sentiment returns we should see markets respond.

My advise is still to sit tight and the situation will right itself over time. Remember “patience is bitter

but it’s fruit is sweet”. I am always available if you have any concerns or would like to talk.

Crypto – I was correct!

I hope you heeded my advice in my last note on Crypto currencies, because as I predicted the value has crashed from around £50,000 to about £19,000 at the time of writing. It looks like it is still highly overvalued by some margin:

Income Bonds are back!

One positive of the interest rate rises is that bank rates are slightly improving. I have always pointed my clients towards National Savings & Investments as they are fully backed by the UK Government. The rates on Income Bonds are now back up to 1.2% on this product that can hold up to £1m, if you do not want to muck around with spreading £85,000’s across multiple banks.