While the war (sorry, Special Operation) in Ukraine continues to take centre stage, there are signs that markets are starting to look beyond it, refocusing on economic matters. In the US, 10 year Treasury bonds currently yield 2.4% which offers precious little recompense when inflation stands at 8.5%. In the UK, 10 year Government bonds yield a paltry 1.8% with a not dissimilar level of inflation.
With worldwide inflation so far outside central banks’ target ranges, such niggardly returns would imply recession. It’s highly possible, if not probable, that a global recession is staring us in the face. Such a scenario was the case before Putin’s invasion of Ukraine but in the wake of it, so many more pressure points have been aggravated, from energy prices to the cost of fertiliser.
We’ve mentioned previously (at some length) how all the world’s major central banks are complicit in this inflationary mess. We would argue the vast majority of their committee members are wholly unsuited to the job in the first place. They have been proven hopelessly wrong about the speed of inflation’s resurgence, its absolute level and the non temporary nature of the latter. All of which means some rather important decisions are hoving into view. The choice is a stark one. Either increase rates to kill inflation and ensure a recession or stand idly by and allow inflation to continue and hope for the best. The former implies the digestion of a huge slice of humble pie which is why our money is on the latter. Davos schmoozers and humility are rarely found in the same room at the same time.