by Paul Wood, CIO Woodhill Asset Management LLP
There are two times in a man’s life when he should not speculate – when he can’t afford it and when he can.
Mark Twain
On a recent trip to London, we found the old city to be a paradox. Evidence of labour shortages were everywhere – for workers it is boom time. The other side of the coin was a little darker. Many shops were closed. Some famous streets had as many shops empty as were open. Far more concerning was the amount of homelessness. If you look in one direction it seems as if London is booming but turn the corner and it looks like a depression.
We only mention this because for investors it now seems that every market is London. The picture is complicated and confused. So many different tunes are playing at once that it is impossible to identify any underlying melody.
- Inflation is high and has not shown any sign of being transitory – at least so far.
- Consumer confidence has collapsed and is at levels not seen since the 2008 financial crisis.
- Bond markets have performed very poorly although a tightening cycle has only just begun.
- China looks trapped by a mixture of its own covid and exchange rate policies.
- The United States is starting quantitative tightening and raising rates, leading to a strong US dollar, which brings its own pressures especially in emerging markets.
- The Bank of England looks to be trying to close the barn door after the ‘inflation’ horse has bolted. Catching the horse again may be much harder than many, including the Bank of England, expect.
- Internet searches for ‘recession’ are spiking – this novel measure of recession worry is at levels not very different to that seen in previous actual recessions. It is not impossible for the world to talk itself into a downturn.
- The Bank of England itself is forecasting a recession for next year – this probably means it has already started.
- Many share prices have come down. While they no longer look as expensive as they did before, any material decline in earnings could be a problem.
- Some prominent US central bankers now clearly believe that asset prices should now be regarded as part of the monetary tool set. When inflation is too low, or the economy is weak, they should be allowed to boom – as this is stimulatory. When inflation is too high then equities should be made to fall – as this will suppress spending. An investor who may have saved for decades might be surprised to find their retirement being viewed as a temporary policy tool. This does not inspire confidence.
- Some allegedly stable crypto currencies have fallen by over 90% over twenty-four-hour periods.
- Liquidity in equity markets is very low. Small swings in sentiment or news flow consequently create euphoria inducing rallies or doom-laden slumps.
At some point things will sort themselves out and the picture will become clearer. In our view, now is not the time to be heroic. It is sometimes better to wait and see, and to take Mark Twain’s advice – speculation – especially when faced with such a fog of confusion – seems far from prudent.