I don’t think Stealers Wheel were referring to central bankers in their 1973 hit ‘Stuck in the middle with you’ although I could well be mistaken. However, everywhere one cares to look at present, the law of unintended consequences appears eager for a fight. Or, to put it another way, Murphy’s Law is alive and well.
Now, I know it’s all too easy to put the boot into politicians, central bankers and policy makers, so I will. Last month, the Bank of England’s Monetary Policy Committee (MPC) voted unanimously to keep rates at 0.1% – an all time low. Yet, inflation is running at more than 3% and the MPC now expects it to breach 4%. They’ve been saying for months that inflationary pressures were temporary but this month the message is to get ready for ‘significantly earlier’ rate rises and Governor Andrew Bailey now believes the breach of the 2% target “is concerning and must be managed to prevent it from becoming permanently embedded”. Showing all the perspicacity of Nostradamus (after his death) he went on “unfortunately, if you look at our last forecast, it is going to go higher, I’m afraid”.
Yet, Silvana Tenreyro, another MPC member, noted that rate rises would be “self defeating” if higher prices for energy and semiconductors proved to be one offs. Well yes, that does kind of capture the essence of the problem but it’s about as useful as pointing out that if it rained and you left home without an umbrella, you might get wet. She went on to say that a proportion of the economically inactive could well be drawn back into the workforce should wage growth prove sufficiently attractive. I won’t labour the point here but the idea that rate increases should not occur until an economy is running at ‘full employment’ is beyond naive. For all sorts of reasons, a proportion of those not working but theoretically available to do so, will never return. But then, she’s an academic. Her CV is impeccable (London School of Economics, Harvard, Federal Reserve Bank of Boston ….) but she doesn’t appear to have ever run a business or taken the risk of setting one up. She’s very typical of the type of person found on all rate setting committees. They believe economies can be directed by remotely pulling/pushing metaphorical levers/buttons in order to get the results they desire. But a degree of real world experience, not to mention a dash of humility, might lead one to conclude that economies are a little more complicated than that and economics is not a natural science.
Talking of energy prices, oil and gas appears to have become the new tobacco. Many institutional investors will no longer invest in the sector, either voluntarily or because their mandates preclude it. And yet, as I write, crude stands at over $80 a barrel, a near 7 year high, while wholesale gas prices are 400% higher than at the start of the year. Reuters recently reported that Germany’s coal fired electricity generation increased by 25% in the third quarter of 2021. I wonder why? But here’s the thing; global energy demand is still growing and the majority of that comes from the developing world, especially Asia. If there’s less incentive for energy companies to increase supply via exploration, the laws of supply and demand will ensure worldwide prices remain firm. Then again, perhaps I’m guilty of naivety. No doubt that nice Mr Putin, recognising he’s responsible for close to half of Europe’s gas imports and around one third of its oil, will help by pumping more to lower prices? According to The Times, he says Russia is doing all it can to stabilise crude markets, yet oddly, at the same time, suggested oil could return to $100 a barrel. What could possibly go wrong?
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This material should not be considered as advice or an investment recommendation. Investors should seek advice from an authorised financial adviser prior to making investment decisions.
John Newsome can be contacted on 01423 705123 or firstname.lastname@example.org. Williams Investment Management LLP is authorised and regulated by the Financial Conduct Authority.