Chief Investment Officer
AS INFLATION EASES THIS YEAR, IT WILL BE TEMPTING TO THINK WE ARE RETURNING TO THE OLD NORMAL. But the ancien régime of low inflation and free money is over. The adjustment process – already so painful for many investors – has further to run, and there is plenty of scope for mishaps as liquidity continues to drain from the system. The market dreams of a Goldilocks scenario, just right for risky assets. But will the bears be kept at bay?
THE DON MCLEAN CLASSIC FEELS LIKE THE PERFECT MOOD MUSIC FOR THIS YEAR’S RUFFER REVIEW.
It has been described as a song about “the nostalgia that comes with closing a chapter in time. A chapter that was good, youthful and innocent.”
When it comes to crypto, we might leave out ‘good’ and ‘innocent’. But 2022 certainly seems to mark the end of a period of exceptional growth for US markets since the 2008 global financial crisis, when falling discount rates on long duration and fantasy cashflows, large buybacks and flows from overseas favoured tech heavy US equity markets, swelling their share of the global equity pie.
BUT FEBRUARY MADE ME SHIVER
In a few years’ time, we may look back on February 2022 as the peak of US financial exceptionalism. The global system dynamic is shifting from being deflationary biased towards being more inflationary biased. The old regime was a convenient exchange, primarily between America and China: between the western desire for inflation stability and emerging markets’ desire for rapid industrial development.
This exchange had side effects: a massive monetary overhang in China, with a bloated banking system vulnerable to its unproductive assets; and hyper-financialisation in the US, with the economy over-reliant on a financial sector optimised for secular stagnation and sustained low interest rates. In other words, intolerant to inflation and higher interest rates.