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A Different World

A Different World

For the majority of the past decade or so, the western World lived in a low inflation environment.
Low-interest rates and central bank stimulus gave a boom in growth stocks and bonds, which lasted over a decade. We now live in a World characterised by soaring inflation driving cost of living crises.

In investing, it is dangerous to extrapolate the past to the future. I would ask all investors, are your portfolios prepared for the past decade or the coming one?

The hope is that inflation is only temporary, or ‘transitory’ as economists put it. An element will certainly be transitory as supply chains mend and basic material prices ease. However, it would be
remiss to ignore a number of factors that are likely to drive inflation and potentially stagflation throughout the next decade.

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Working Age Population

Firstly, working-age populations in the Western World are generally shrinking. An even more important shift is now occurring in China, which has exported deflation across the globe by providing a cheap and efficient workforce for over three decades. Now its workforce is reducing, and wages are rising. If you believe in the law of supply and demand, it is reasonable to believe that a diminishing global pool of productive workers will command higher prices and drive inflation.

Fossil Fuels

Secondly, investment in fossil fuels and nuclear has been reduced before renewables are able to replace them sufficiently. For example, falling capital expenditure has led to new discoveries of oil and gas falling from 30m barrels of oil equivalent a day in 2012 to just 5m in 2021. And arguably, the biggest policy mistake of the last 10 years is that we have less global nuclear output than a decade ago. The problem with wind and solar is that there currently is no way of effectively storing it, so they only supplement the grid when there is enough wind or sun. This lack of investment in fossil fuels and nuclear will be an inflationary force throughout the coming decade as demand will continue to outstrip supply in the absence of severe recessions.

De-Globalisation

Thirdly, we are entering a World of de-globalisation, as tensions between the different civilisations break down and countries ‘re-shore’ manufacturing. One of the first things you learn in economics is the law of comparative advantage. It demonstrates that if an economy can manufacture goods or provide services with a lower opportunity cost than another, which has an advantage in producing a different good or service, then by trading there is a net gain to both economies and people will enjoy goods and services more cheaply. If countries choose to trade with less efficient partners and try and produce goods themselves at a higher cost, this is indeed inflationary.

These elements have been a long time in the making. Inflationary pressure had been building for a
while, even before the pandemic. Re-openings followed by the Russian invasion of Ukraine were just
the spark that lit the explosion.

The outlook for Western economies is grim; central banks are being forced to raise interest rates, exacerbating the cost-of-living crises, and governments have little room to help, having blitzed more
than they could afford implementing lockdowns.

However, it is important to remember that it is always darkest before dawn, and it is when times are dark that opportunities can be purchased at a heavy discount. They must be bought with the future, not the past in mind, though.

A well-thought-out plan can not only help you work toward realistic goals, but also help you avoid costly mistakes.

Reach out to us today for professional, tailored advice so you can look ahead with
confidence.

Risk Warning: Opinions constitute our judgement as of this date and are subject to change without warning. With investing, your capital is at risk

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