This is my first ‘Round Robin’ e-mail since the end of June but that doesn’t mean I have not been paying attention to what has been going over the past couple of months – and it has been a lot!
The war in Ukraine continues unabated with seemingly no peaceful resolution in sight and this has exacerbated the inflationary pressures already being felt around the world. We knew of course that inflation was likely to rise as we emerged blinking into the sunlight at the end of the pandemic, people had money to burn and supply chains remained gummed up, with some countries, notably China, still enforcing lockdowns even now – the war in Ukraine has just made things worse.
The impact of the war in Ukraine cannot be overstated, the dramatic increase in wholesale gas prices is largely down to restricted supplies coming out of Russia and it’s difficult to see this changing much in the short-term, particularly while sanctions persist, and Putin needs a way to fight back.
The outlook for the UK has worsened considerably over the past few months as the Bank of England (BOE) constantly revises its inflation forecasts upwards, heralding a tough winter ahead with energy bills likely become difficult for some and unaffordable for many. Whether or how the government can help those most in need remains to be seen.
The following chart shows how dramatically the BOE forecasts have changed since 2021:
There are 2 particularly striking aspects to this chart,
How did those in charge of forecasting inflation, the so called ‘experts’, get it so wrong?
The expectation remains that inflation will revert to somewhere near the BOE’s target of 2.0% per annum by the end of 2024. Given my question in 1. above, how much confidence can we have that inflation will not prove more stubborn and difficult to shift?
In May 2021, the BOE was predicting inflation would peak at around 3.0%, by Feb 2022 this forecast had increased to 7.0%, only to be revised upwards again in May to 10.0% and then last week to 13.0%! As I say, how could they have got it so wrong?
It doesn’t help to apportion blame for this incompetence ….. but I’m going to. It’s Andrew Bailey’s fault, along with his fellow Monetary Policy Committee (MPC) members! Bailey was head of the Financial Conduct Authority from 2016 to the time of his appointment as Governor of The Bank of England, and he was pretty useless there too, presiding over a number of financial scandals in which many innocent victims lost their savings and dreams of a comfortable retirement. His reward for these failings was to be appointed to even higher office, a perfect example of someone being promoted beyond their capabilities, I do remember shaking my head at the time.
By way of providing a little balance, it must be said that being Governor of the BOE at the moment is something of a poison chalice, but we really should be able to expect more from our central bankers, steering us through this kind of maelstrom is pretty much their one and only job.
The markets take on this has been clear, the BOE should have raised rates sooner and more sharply as a signal that taming inflation was an urgent priority; it does now at least seem to have got the message. Last week’s Interest rate increase of 0.5% was the highest in 27 years, taking us to 1.75%.
The following chart shows how the Base Rate has changed since 2006.
The purpose of interest rate increases when attempting to combat inflation, is to reduce the amount of money in the economy, the idea is that if people and businesses have less money to spend (because their borrowing costs have gone up), demand will fall, followed soon after by prices. Whether this tactic will work, given that current inflation has not been caused by an overheating economy but (partly at least), by a foreign war, remains to be seen.
What interests me about the above chart is that there must be an entire generation of borrowers who have grown up on super cheap money and who might now face significant increases in their monthly mortgage and/or credit card payments at a time of rising energy bills and other non-discretionary items like food.
The last time interest rates went up by 0.5% rates were already higher, so the impact was arguably less. Going from 1.0% mortgage payments to 2.0% say, means your payments will double; if you are a young couple on a tight budget facing a winter of higher bills, this must be very concerning indeed.
At the BOE press conference, Andrew Bailey mentioned the dreaded ‘R’ word, recession and this prompted my eldest daughter to ask me, ‘What’s the difference between a recession and a depression?’ I think the following definition just about it sums it up:
I have already learned the difference between a Recession, a Depression and a Panic.
A Recession is where you tighten your belt; a Depression is when you haven’t any belt to tighten, and a Panic is when you have lost your pants.
— The Ephraim Enterprise (Ephraim, UT), 21 Jan. 1949
A depression is no laughing matter of course, just spend a few minutes reading about the early 1930s and you’ll see what I mean. By the way, I don’t think anyone is actually predicting a full-blown depression.
What did the financial markets make of all this talk of catastrophe? As usual, all the bad news, the increase in rates, the threat of recession etc. had already been priced in, and markets hardly moved at all. In fact, in recent days, US jobs data has surprised on the upside, putting a question mark over whether the US might actually escape a recession and markets have moved further forward. As I type this on 8th August, the FTSE is up 0.83% and the S&P 500 is up 0.74%, following quite a decent recovery which began on 16th June, see below:
This chart shows the performance of a selection of the EBI portfolios since 16th June (yes, I did select the date carefully).
The portfolios are still down Year to Date, but things are looking a little better, for now.
This positive past few weeks does not necessarily mean the Bear Market is over and it’s entirely possible that markets might lurch downwards again at any moment BUT this shouldn’t alarm long-term investors.
Conclusion
In conclusion, the markets maybe don’t seem as pessimistic about prospects as Andrew Bailey did during his press conference but as always, we’ll have to wait and see.
I do hope the above makes sense but, as always, if you have any concerns about your own financial arrangements or would like to discuss whether you are truly making the most of your money, please do not hesitate to call me.
With kind regards,
Yours sincerely
Graham Ponting CFP Chartered MCSI
Managing Partner
