It’s starting to feel a lot like Christmas! For once it really does look like it might be a white one. As I type away, driveway covered in snow, I am grateful for a pandemic that made working from home a reality. No longer must I try to navigate whatever the roads, railways and tube lines might have otherwise brought. Pretty sure even I would skip the Boris bike today, although we’ll never know now.
2022. If you feel like it has flown by, cast your thoughts back to where we were last year. A Christmas cancelled. This year participation feels harder with the price of…well…everything. Crackers. Rates were basically zero or still negative. There has been frequent talk on the subject of magnitude of rises and multi-decade records since “the last 75” basis point hike. More palatable when already at 5/7/9%. Less digestible when comparing with history, where it looked like we flatlined and were subsequently defibrillated back to life. War was also something that happened somewhere else. Invasion was supposed to be a tool for the history books. Inflation also something that only happened in far-flung places and often accompanied with internal political strife.
Now to look ahead…As it stands the excitement is rolling in right up to the finish line. This week sees the major central banks of the US, UK and Euroland raising, along with several others, climaxing on “Super” Thursday. The upward motion remains, the big question now is for how long? Employment appears to be holding up, which had at one point in our recent past been key to anything and everything. Signs of recession and pockets of leveraged exuberance are growing though. The hangover starting to throb before we’ve even started Christmas dinner.
One of the earliest to break the line and raise in this new cycle, Czechia, printed their latest inflation data Monday morning. Despite their hiking, on an annualised basis, inflation (CPI to be exact, so consumer prices, meaning you and I specifically) printed at 16.1%. Rates were slashed to an all-time low of 0.25% in May 2020. One may perhaps think their pace there was off, being first were they hike shy? Absolutely not is the short, and polite, answer. Since the middle of this year, the base rate has been sat at an eye-watering 7%. Whilst central banks can all talk about the need to temper expectations and forego salary increases, the reality is squeezes of the magnitude witnessed this year cannot simply be swallowed. So as we enter 2023, what might we expect?
Continued pressure on income seems inevitable, along with more fractures in sectors that have enjoyed money that has been (too) easy to come by. Small fires everywhere is an expression that springs to mind. Whilst hikes may slow, quantitative tightening is poking its head from behind the curtain waiting increasingly impatiently for its performance front and centre, before being subsequently (and swiftly) booed off stage. Straight to DVD for those that lived in a world before streaming. The impact? A further drain on liquidity and likely a continuation of the widening between risk free rates and riskier outfits far and wide. Whilst a more appropriate pricing of risk and respective reward seems both fair and right, not everybody makes it out alive. “This time it’s different” but perhaps not in a good way.
I refer you back to the percentage not just magnitude of the price to service debt, globally. The problem is growth, and achieving it in an environment where it is (blatantly) being put in second place. With all this going on, I’ll be keeping a finger on the pulse of where respective governments are faring as life support machines are dialled down and consciousness is regained. I suspect we revisit more widely and vigorously the idea of sovereign solvency. Queue quickly formed armies of bureaucrats trying not to get caught behind. Again.
A bumpy ride for those dealing in Euros this year. We saw the currency tested and falling below parity with “dollar king”. This despite rates going from negative levels to being projected to be at close to 3% by next Easter. If that doesn’t put an end to the sugar rush, perhaps the “proper” unwinding of much of the ultra-cheap cash the ECB provided being sent back (in the form or TLTRO repayments, with a further EUR 447.5Bn being repaid this month) will push money market rates somewhere closer to base. Once the NY beauty parade is over and business kicks back into full swing, chances are the competition for cash will begin. Good if you have money as long as you have access to those who want to pay a fair price for it of course. If only finding those folks were easier!
Oh Blighty…forever it feels the winner. Of the wooden spoon. But is it really that horrible out there? Potentially not. Employment has remained strong. Hopefully comforting to some. I know from my household that being made redundant (not me this time, just for the record!) actually created the space to find a better gig, for more money, better hours, bigger opportunity. On any given day there could have been 5 interviews going on in our lounge. Guess that is one of several reasons she is referred to as my better half.
The cost of some “essentials”, from petrol to property, also appears to have come off. A little. A bitter-sweet victory. To me at least, part of the story is being fed to us is from a central bank hoping to outperform the expectations we place on “The Old Lady”, whilst magically tempering our own expectations of inflation which should then materialise into, lower inflation. One must remember it is no easy job, but that does not make it ok to come out mediocre at best. The world is watching…
Call me biased but the UK has at times felt a little “oversold”, reality not always being as terrible as any of the papers would have us believe. I’ll be the first to be willing to pay more tax if it helps curtail the cost of borrowing, delivering additional support to those that need it the most. What is harder to support is some of the strike activity which in the end helps nobody. Rises yes. But let’s let things settle down a touch before demanding CPI+ which will literally only lead to less spending power in the end, forever chasing our tails and in the meantime, more damage (silver lining, my liver is grateful). Whilst I have long maligned the “transitory” falsehood propagated for too long by Central Bankers far and wide (see here from September 2021); I equally find it difficult to believe that ALL of the supply-side and imported inflation that has hit our pockets in 2022 is permanent. We need to be very careful about irreversibly increasing wages in line with expenses that are currently (arguably) artificially high. If we get it wrong, we will only add fuel to the same inflationary fire that Central Banks have been trying so hard to pour water on all year.
Don’t fight the Fed. Unless apparently the entire market is in disbelief as to how high rates might go. The word from rate setters? Investors are underestimating how high Powell can go before pressing pause. If the experience from those hiking sooner is anything to go by, then my dollars are on the central bank. Hope to be wrong. They have been for last 18+ months. The only thing transitory being our spending power! Either way, putting cash to work has not looked so good for a long time. Add to that the inevitable reopening of the financial markets in January and it is possible we see some even better term rates come through, especially with credit becoming a larger component of price. Either way, the opportunity cost of not taking action in 2023 looks too high to remain complacent, as it is inevitable that at some point levels become unsustainable and growth/employment become important once again, because they have deteriorated following blunt instrument to prices.
Will the Russian aggressions freeze themselves out in a brutal Ukranian winter, or do we need to steel ourselves for a longer-term “cold war”? Will the US elections bring the country back together or lead to ever-greater political and social discord? How will that affect tensions with China over Taiwan? And how will China hold up following populist anger at a zero-COVID policy, its reversal, and now confusion following years of the opposite messaging? This along with an over-indebted property sector that was betting the house/hotel/casino on pre-COVID growth expectations? I don’t have the answers. But I do know that if I could have one Christmas wish it would be geopolitical stability in 2023.
However you are spending the rest of the month and whatever you may or may not be celebrating, as always we wish you only the best and hopefully some time for reflection, gratitude and enjoying simple pleasures with loved ones.
2022, you’ve kept us on our toes. 2023 – dull is fine. Really.