The numbers keep deteriorating. Japan’s economy contracted by 7.8% in the second quarter (versus the first quarter) as exports and consumer spending plummeted. Germany’s fell a record 10.1% while the EU average slumped by 11.9%. The US posted a 9.5% decline while the UK delivered an enormous 20.4% contraction, although this could yet be revised favourably.
The easing of lockdowns will see improvements in the third quarter but falls of this magnitude illustrate just how difficult it will be to reclaim previous levels of output. That said, interest rates are effectively zero everywhere and the US Federal Reserve has just announced a new policy where it will tolerate inflation above its 2% target for an extended period in order to make up for past shortfalls.
In our view, the economy is not an entity that can be accurately ‘prodded’ to produce what politicians and central bankers desire. Such people have far too much faith in their abilities and all too often, the laws of unintended consequences have already contrived to ambush them (and their egos) a little further down the road. In this case, we venture such consequences will include a hefty dose of inflation that will explode seemingly out of nowhere although, to our eyes, it takes relatively little foresight to guess what will probably happen when money is free, the printing presses are overheating and sovereign borrowing is out of control.
We believe investors’ best chance of securing pleasing investment returns against such a background hasn’t changed. We will continue to purchase enterprises of substance and where they are not available at prices we deem acceptable, we will wait until they are.