Analysing The Political Economy

Fear Factor: Where Should You Put Your Money Now?

By Graham Vanbergen: I’m not a seasoned investor or a financial advisor. I don’t consider myself an ‘expert’ in anything much and all of what you read here, is merely my opinion. However, I did put a big bet on Brexit even though I’m a ‘remainer’, I did predict the loss of several Tory PMs as a result and that the promised sunlit uplands would never come. Months ago, before the analysts and economists were forecasting a recession, I not only predicted that but went a step further and boldly forecasted stagflation for 2023.

I have consistently warned that worse is to come. I have put my money where my mouth is. I have steered clear of stocks/shares of any class for 2022 and even sidestepped traditional safe havens such as bonds. For me, we are witnessing in real-time a new era. There is nothing cyclical about what is unfolding.

The global Fear and Greed Index sits at 12 and is well entrenched in the category of ‘extreme fear.’  Only one month ago and for the previous 12 months – investors were happily sat at 41 – ‘just a bit fearful.’ Not now. Stocks, options, safe havens and bonds – have all entered ‘extreme fear’ territory all at the same time. The fear factor really is a thing.

Look around you right now. The age-old advice of a 60/40 equities to bonds portfolio is haemorrhaging value. Quality growth stocks have taken a nosedive as have just about all the indexes you can find.

The highly regarded Vanguard Global Corporate Bond Index is down over 12 per cent year to date. The MSCI World Index has done just as badly – down 13 per cent. The FTSE is now the same value as it was in 2017.

The FT reports today that – “no amount of fretting about market crashes and looming recessions can allow central banks to even begin to look like they aren’t fully focused on having a go (however fruitless it may be) at bringing it back under control. So here we are — in what Andrew Lapthorne, Société Générale’s head of quantitative equity research, calls the “unusual” position of seeing equity and bond markets imploding at the same time: between them, they have lost some $23tn of value since their peak last year. That’s a lot of losses.”

Many analysts are now forecasting that inflation is almost at its peak, having not forecasted inflation to be more than 5 per cent (just a few months ago) – and even then in only a transitory short period (ha!).

The thing is this. Even if inflation did start to retreat, it won’t get back to the Bank of England target of 2 per cent any time soon – certainly not next year. And even if inflation were to half, prices are still 5 per cent higher than they were a year before.

We’ve had an era. That 30-year era was of interest rates heading down, which meant controlling inflation was much easier. Now we’re about to enter an era of higher interest rates, which means the tools available are there, but much harder to use.

Last year, much to the amusement of some, I predicted that things would get so bad that the entire Western world was about to enter this new era. My thinking was that globalisation had fractured under the pressures of the pandemic, that alliances would rapidly change, that governments would start hoarding to protect their economies and that the very dynamics of globalisation – itself deflationary in output – would fail. I also posited that there would be a rapid change of capital investment put towards fighting the climate crisis – and this meant an inflationary pressure over a much longer period.

Russia’s attack on Ukraine has massively exacerbated this forecast. Last year, a dozen of the biggest fossil fuel polluters in the world put £100billion into clean energy resources as even they can see the writing on the wall. As we’ve reported today, Germany has an inflation figure for production at nearly 34 per cent.

It might surprise you to know that even amongst the huge supplies of gas and oil being funnelled into Europe – last year, western oil companies found new oil and gas reserves of less than 5 per cent of usual global demand. This was a record low. That signals only one thing ahead of us all – inflation and higher prices on everything for the long road ahead.

The indicators for a turnaround are not there. The Western world has an ageing population, and this is a demographic who have never been wealthier, so they are not spending less. And contrary to many forecasts, computerisation and digitisation has not brought us productivity gains over the last 40 years, because in real terms that has been falling, especially in the UK, USA and Europe. IN other words, the deflationary gains made by the modern world and globalisation have been made and can’t get lower. There is only one direction.

Two weeks ago – Andy Haldane, who is now a government adviser, said that inflation had “surpassed my worst expectations” – and that higher interest rates could stick around for years as well.

“And it’s not just that I think the level of inflation is high, I’m slightly fearful it might stick around for some while as well. This won’t come and go in a matter of months. I think this could be years rather than months.” Haldane also warned that the rises now anticipated would hit a generation of mortgage holders who have become accustomed to lower interest rates.

For me, the expectation now for the rest of this decade is volatility and inflation.

So, what has performed well in times like these? The five big asset classes are generally seen (for us in the UK) as being US stocks, UK FTSE, UK bonds, Gold and Property. Since 1988 only one asset class has never entered negative territory – property. Gold always performs well. We’ve already seen that UK bonds as a traditional safe haven is on a losing path.

So that is where I am – invested in property and gold – and I’m sitting there, quite probably for quite a while. Property is quite likely going to hit zero or possibly a minus point or two in the next year or two but it generates inflation-linked income. Gold is exactly what it is – a counterbalance to the fear factor and there’s an awful lot of that about right now.




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