November 13

Weekend reading: Move on up

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What caught my eye this week.

The markets are throwing in the towel on the notion of ‘transitory’ inflation, or at least transitory US inflation. The US consumer price index just jumped 6.2% – the most since 1990 – and alternative measures that strip out everything that Americans actually want to buy show rising prices, too.

Some holdouts still believe this could be an American issue. They finger more generous fiscal stimulus in the US. Europe and Asia might yet avoid surging prices, they suggest. But that doesn’t seem likely to me.

Prices are already up in the UK and inflationary Brexit issues – border friction and staffing shortages – are piling on top of the global trend.

More generally, Covid and waves of economic shutdowns happened globally. And those disruptions are what’s caused these rising prices.

Our best hope – which I’ve held all year, and still haven’t totally given up on – is that inflation should ease as we get past the worst of Covid. Some price rises may even reverse as deflationary forces take hold once again.

However I’m reluctantly coming around to the view that higher prices may persist for a while.

And that’s mainly because they are already persisting!

The more we see rising prices, the more companies and consumers alike expect more of the same. Companies will increase prices where they can, and we’ll try to get pay rises to keep up.

That in a nutshell, is what they call spiraling inflation.

We best hope it doesn’t get out of hand.

Keep on keeping on

Should Central Banks be quicker to raise interest rates in response to rising prices? The US bond market has been mildly roiled recently by fast-shifting calculations concerning exactly that.

I’m not convinced the boss bankers should be in a big hurry, however.

Let’s think about why we have these rising prices today.

Back at the beginning of Covid consciousness – late February to March 2020 – there was no consensus as to how nations should tackle the threat.

As long-time readers may remember, I was wary of mandating blanket economic shutdowns. True, that had seemed to do the trick in China. But China had only needed to totally switch off one province, and I feared the consequences of shuttering countries. I wondered if Westerners would even submit to such mandates. If they did, there would be a big hit to GDP –and more importantly some lasting economic damage (or “scarring”).

As it became clear a second wave of Covid was coming in the UK in late summer 2020, I gave up my side hustle as a freelance epidemiologist. It was clear I’d misread some of the early data. Moreover the experts were right – Covid would be with us for a time. No use in wishful thinking.

Nevertheless, that time looked truncated when the first vaccines arrived in Autumn 2020. Especially when their efficacy data was better than anyone expected.

Since then the vaccine picture has got murkier. They have done a great job preventing death and reducing hospitalization. But – perhaps because of the emergence of the delta variant – they have done a more limited job in curbing transmission. Worse, more than 100 people are still dying of coronavirus every day in the UK, including plenty of unvaccinated. The picture is similar the world over. This all has consequences for our economies, and hence inflation.

Persistent Covid has led to a pattern in most countries of waves of infection, some measure of lockdown and restriction, and then periods of rebounding economic activity. Set against that is an ever-rising count of vaccinations (that has rightly made people feel safer) and natural infection (that probably hasn’t, but has ultimately conferred the same antibodies).

It’s looking likely the pandemic endgame is most people in most countries get vaccinated, but the virus never vanishes. Many of us will encounter Covid again in the wild during an Nth wave, but we may not be much affected after repeated vaccinations and low-level infection. There are good new drugs to treat infection coming on-stream, too. Eventually, Covid fades into the background as enough people have been exposed, perhaps multiple times. With luck it doesn’t flare up as something deadlier or even more infectious.

One reason for this fatalistic attitude is what’s happening in Europe right now.

For the past few months people have asked why we can’t be more like the Germans, say, who had seemed to have avoided a delta wave. In recent days though a new wave has taken off in Europe:

True the vaccination rate isn’t especially high in Germany and Austria. There may be other local factors, too.

But there really doesn’t seem much room between the most extreme measures – China’s zero-tolerance, say – versus trying to vaccinate as many as you can and then opening up and running hot, as we’ve done.

Anything less than fortress isolation and it seems Covid will come and find you out, sooner or later. After that it comes down to managing peak numbers to prevent pressure in hospitals.

The Netherlands is even going back into a partial lockdown.

Keep on pushing

Back to inflation, and Covid’s impact on the economy. What we’ve seen over the past 22 months as the above pandemic has played out is:

  • Consumers save a lot when in lockdown
  • Most are happy to start spending when restrictions ease
  • This has led to wild fluctuations in the savings rate
  • It’s also left companies by turns over and under-estimating demand

There has been huge disruption to supply chains and working practices caused by both Covid and by measures to restrict its spread.

Some people believed we could switch off the economy and then on again with almost no impact. Almost like moving one cell in a spreadsheet from column A to column B.

And indeed, this has sort of happened at the aggregate level. Albeit at the cost of a piling on a lot of national debt to make this ‘suspended animation’ possible. (With furlough payments and the like).

GDP seems to recover sharply from lockdowns in most countries. Even where a lot of jobs were lost, such as in the US, the vast majority of those who want work have now found it again.

However it has not been exactly like that cell copy-and-paste process when you look into the weeds.

Maybe I’ve spent 20 years too long reading company reports, but I was adamant that turning off the economy would snarl the global economy up to some degree. Today’s companies are run so efficiently they get disrupted by almost anything, and they happily make this plain to shareholders. So it was clear to me that suppliers and customers unpredictably blinking on and off like a globalized game of wac-a-mole would cause trouble.

In this stop-go economy, if you need this or that commodity or component to finish your product and meet recovering consumer demand, you will pay up for it. Perhaps a lot. Since you can pass at least some of the cost on to newly-ravenous consumers, you do. Hence rising prices.

Still, I believed this would be a one-off shock that would soon get sorted in a few months. But I was wrong about that. The rolling waves of Covid and those on/off restrictions mean different bits of the economic tapestry are going offline at different times. So the disruption continues, perhaps hidden by what’s captured in noisy overall GDP figures.

There are other factors, too. I’ll leave you to have a Google if you’re curious, but the biggie is obviously a labour shortage in many Western markets.

Some people left the workforce early – aka the Great Resignation. Others don’t want to do what they did before, having reassessed their lives from their couch for a year. (Put serving staff into this bucket). Some people are still scared of getting sick. A lucky few have maybe made so much from rising asset prices that they don’t need to work any more.

Near-zero interest rates are a factor at the margin, too. To lots of everyday people, saving seems a waste of time. True, rates have been low for a very long time, but many people didn’t have any savings for much of the past decade anyway so they were none the wiser.

Now they do have cash – from government support and enforced confinement – they see little incentive to save it.

The wealthy already save too much (arguably), but I notice many are now happier to flash extra cash at the margin, post-Covid. Certainly my richer friends have paid almost any price to travel this summer. Even I overpaid for my recent jaunt to Cornwall.

It all adds up.

People get ready

So basically we have more people with more money to spend chasing goods and services that cost more to make because someone somewhere in the world couldn’t make or do something else, or didn’t want to buy what someone else made.

Simple, eh?

The trouble is it’s hard to see this situation changing anytime soon. That’s because Covid continues to be felt across the globe.

Companies will get better at flexing their supply chains – they already are – but there’s a limit, and anyway it costs money. Which is itself a recipe for higher prices a few months from now.

Then you have recovering rents (for landlords of all sorts) and other postponed inflationary hikes as we return to normal. (Though some of this should soon be eased from a CPI perspective by the 2020 recession lows falling out of the statistics.)

I suspect all this is why the Bank of England and the US Federal Reserve still aren’t raising interest rates. Them making money more expensive on top of everything else won’t do anything to solve disruption problems. Much higher rates could conceivably make it much worse.

That said, Central Banks are well aware that they can’t let this get out of control. Raising rates will curb demand, even if it doesn’t help the supply situation. So we can be pretty sure they will act eventually – probably once they believe the economy is sufficiently settled to take the shock.

Maybe we can all agree not to ask for a pay rise? That’s our best bet for dodging embedded long-term higher inflation – and consequently much higher interest rates, which would do wonders for our cash deposits but smash bonds and likely also hit richly-valued shares.

How about it? A collective sacrifice for the good of a long-forgotten statistic like CPI?

Yeah, me neither. Best buckle up for a bumpy ride…

…or else hope that all this fear becoming the consensus view means we’re actually at the peak of inflation concerns? Maybe when the Fed blinks – and everyone is all-in on inflation – it’ll be time to contrarily buy 10-year bonds!

Funny things, markets.

Have a great weekend everyone.

From Monevator

How to complain about a financial provider – Monevator

FIRE update: six months in – Monevator

From the archive-ator: How gold is taxed – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

US inflation hits its highest level since 1990 at 6.2%… – Sky News

…while crisps and soft drinks lead a surge in UK food prices – Guardian

Brexit: UK looks likely to trigger Article 16 – BBC

Disadvantaged graduates earn half as much as privileged peers in first job – Guardian

Could tougher EPC regulation hit the price of Britain’s Victorian homes? – ThisIsMoney

“We lost festive savings in family WhatsApp scam”BBC

It’s time to scoop up cheap UK stocks, says JP Morgan – Market Watch

Products and services

Investment trusts rediscover their roots with a 21st century twist [Search result]FT

Is Bitcoin now too big to fail? – Institutional Investor

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

Seven things you should know about Junior ISAs – Which

Venerable dealer Stanley Gibbons touting co-investment into world’s most valuable stamp – Showpiece

Uber raises London fares by 10% in effort to lure back drivers – Guardian

Another article on the ins and outs of heat pumps – ThisIsMoney

Homes with great walks on the doorstep, in pictures – Guardian

NFT mini-special

How NFTs create value – Harvard Business Review

You nowadays need to buy a basket of crypto assets – Fred Wilson

NFT games are a tax-filing nightmare [US but relevant]Protocol

Comment and opinion

What it’s like to grow up in a FIRE family – Budgets are Sexy

You are what you eat, and invest – Incognito Money Scribe

Index funds track the ‘investable’ half of markets – Pragmatic Capitalism

Asset allocation when you have enough – Morningstar

When cash is king – Humble Dollar

How to invest when inflation is high – Of Dollars and Data

When the living is easy – Banker on FIRE

Thoughts on Safe Haven by Mark Spitznagel – Simple Living in Somerset

Taxing – Indeedably

Remembered: first steps on a nine year march to FIRE – A Purple Life

Do interest rates matter more to the economy or the stock market? – AWOCS

The mirage of direct indexing – Enterprising Investor

Naughty corner: Active antics

Institutional investors don’t care about gold anymore – Klement on Investing

Valuing Tesla. Again. – Musings on Markets

Investing lessons from the Stoics – The Undercover Economist

Long-term investors must make a Ulysses pact – Behavioural Investment

The return of the return gap: Ark Innovation edition – Morningstar

A candid account of some less-than-stellar investment trust trading – Getting Minted

Covid corner

The Covid [treatment] drugs are finally here [Search result]FT

Over 11 million booster shots now given in Great Britain – UK Gov

Kindle book bargains

Exponential: How Accelerating Technology Is Leaving Us Behind by Azeem Azhar – £0.99 on Kindle

Happy Sexy Millionaire: Unexpected Truths about Fulfilment, Love, and Success by Steven Bartlett – £0.99 on Kindle

Billion Dollar Loser: The Epic Rise and Fall of WeWork by Reeves Wiedman – £0.99 on Kindle

Liar’s Poker by Michael Lewis – £0.99 on Kindle

Environmental factors

Climate talks into overtime as nations near deal – BBC

Where to find an extra £20,000 for an electric car, and other COP 26 questions – BBC

The enormous hole that whaling left behind – The Atlantic

Turning cities into giant sponges to embrace floods – BBC

Off our beat

Experts from a world that no longer exists – Morgan Housel

Truth is elusive, but it isn’t evasive – Seth Godin

Will Johnson’s Global Britain ever escape the shackles of Brexit? – New Statesman

Things nobody ever tells you about making friends in adulthood – Art Of Manliness

And finally…

“Like the old miners, coal has almost completely disappeared from our lives.”
– Jeremy Paxman, Black Gold: The History of How Coal Made Britain

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

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