Readers may know that I am given to wasting some of my spare time on the golf course. One of the many truisms of this utterly pointless game is that no matter how bad one’s last shot, the next one can still be worse. It is a salient lesson for the World in October 2022: no matter how ludicrous the previous week has been, the next one can put it in the shade. And so we embark on our weekly exercise of trying to make sense out of the insanity.
I start with what we all collectively refer to as ‘the markets’. Apparently the markets are infallible and we have to bow, nay grovel, to their every whim. We have argued for the thick end of a decade that ‘the markets’ have acted as addicts, hooked on the financial rush of quantitative easing. It is likely that what we are currently witnessing is their cold turkey as they seek out their next addiction. Authorities have been beholden to ‘the markets’ since the so-called ‘taper tantrum’ of early 2014, when they threw their teddies out of their pram in response to the Federal Reserve’s intention to raise interest rates. Ever since, financial policy-making has been dominated by a mantra of ‘don’t upset the markets’.
These markets, as we know, had another bout of teddy-chucking in response to erstwhile Chancellor Kwarteng’s mini-budget. Why? No one actually knows whether it would have worked, or would have been inflationary. Many have speculated that it would have raised inflation, but these would be the same ‘experts’ who so utterly misunderstood the inflation being caused by post-pandemic monetary policy. Instead, markets are choosing to find solace with a Governor of the Bank of England who a) was bull’s eye central in starting this inflation in the first place, and b) is dead set on creating a recession to cure us of the inflation that his Bank has caused. It is madness. But it is important to know that this is madness and to avoid becoming sucked in. Just because ‘the markets’ like something, it does not necessitate that it is the right thing to do.
I have stressed this many times before, but it is important to do so again. To label inflation as an ‘international’ problem, caused by the Russians and the Chinese is either gross disingenuity or simply wrong. The headline US inflation rate in January this year (ie a month before the Russian invasion of Ukraine) was 7.5%. The Federal Reserve only stopped buying bonds as part of its quantitative easing in March this year, a month in which the inflation rate was 8.5%.
Is it too simple to ask that if the Central Banks were not using quantitative easing to create inflation, then what were they using it for? What we are seeing is the unequivocal success of quantitative easing; it does what it says on the instructions. One can only guess that the Banks have actually not read said instruction manuals.
No matter. The markets, also, appear to have skipped this important background reading. Chancellor Hunt (who appears to be de facto Prime Minister Hunt) is kowtowing to the markets and dismantling the policies that members of the Conservative Party voted for. I have no idea whether or not the titular prime minister will remain the incumbent of Number Ten, neither am I terribly bothered. Power clearly resides with Hunt and he is, at least for now, providing the powder that the markets crave.
Away from Westminster, last week the US core inflation rate was revealed to be slightly higher than was expected. It was not by much – 6.6% instead of the 6.5% predicted – but it was enough to again unsettle markets. This actually tells us very little: inflation will always wobble around from month to month, and markets are skittish. Some commentators have described this as being evidence that inflation is already ‘sticky’, presumably in the expectation that the Federal Reserve genuinely has a magic wand and there is no delay between the raising of interest rates and a fall in inflation. Regrettably, there is a risk that the Banks themselves believe this fallacy and keep on raising rates.
We will continue to argue that the bricks for a fall in inflation are already in place. Growth in the amounts of money (data conspicuously ignored by Central Banks) has shrivelled, mortgage rates have soared, as have the costs of lending to corporates. Markets have also closed the ability of governments to borrow willy nilly. Energy prices will also fall, despite OPEC’s best intentions (as we discussed last week). What is needed is patience, a commodity regrettably in very short supply.
Finally, congratulations to those who knew last week’s excerpt from Van Morrison’s ‘Jackie Wilson Said’ (and half a star to those citing Dexys Midnight Runners). Today, this is probably one we have asked before, but it is also worth repetition: where does Terry meet Julie every Friday night?
Jim Wood-Smith – Market Commentator and Head of Climate Transition
FPC628
All charts and data sourced from FactSet
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