Not for the first time, this month we find ourselves writing something very similar to what was written the previous month and indeed, the months before that. Markets recognise economic recovery is clearly on the march but Covid-19 outbreaks (and variants thereof) together with higher inflation, temper optimism.
If rising prices are indeed temporary, herd immunity continues to strengthen and interest rates remain close to current levels, then the future has a much greater chance of turning out acceptably well. However, if the opposite is true, the medium term assumes a much more sinister hue. This would look much closer to the early/mid 1970s, though hopefully without the added trauma of tank tops and kipper ties.
The 1970s witnessed ‘stagflation’; the joyless marriage of stagnant real economic growth and problematic inflation. It surprised many economists that this unlikely couple could cohabit at all but it was a relationship that endured. Should it return, politicians and central bankers have far less ammunition to fight it due to high debt levels (both sovereign and personal) and real interest rates already in negative territory. Furthermore, we suspect neither group will have the backbone to implement the required response, in any event.
So, we do not anticipate a helping hand from governments and monetary authorities. Their endless borrowing, printing and spending has seriously removed whatever room for manoeuvre they had left. To our eyes, the best option lies with ownership of high return on capital businesses that enjoy enduring pricing power.
