Part 1 of a 5-Part Series: What Have Past Inflation Crises Taught Us About Investing?
By James Pearcy-Caldwell, Aisa Co-Founder and Compliance Officer, and Chris Lean, Chief Investment Officer
Inflationary periods in the past show us what to expect this time around.
Currently, investment performances to July 2023 have been poor in nearly all markets, both equity and bond based.
The exceptions have been:
- High tech firms linked to the advent of AI technology and the consequential requirements from software and hardware firms.
- Armament and associated companies linked to the heightened state of alert between countries as a result of world turmoil largely based around 4 countries.
- Energy companies (including both conventional, nuclear and new age) linked to both the rush to net zero emissions (clean energy) combined with damage to current energy supplies in certain geographical regions such as gas in Europe.
- Bio-tech discoveries linked to worldwide pandemic.
Whilst some people have been able to take advantage of these areas by solely investing in them, they are increasing risk exposure. This is because all of these areas have been extremely volatile in the last 2 years. There is no guarantee they will continue to grow, nor even maintain the gains they have already achieved. In fact, some are reaching saturation and exhibit bubble-like tendencies.
Inflation, leading to higher interest rates, leads to higher debt costs and higher supply costs. This impacts fixed interest borrowing. Additionally, it impacts government borrowing costs, company costs and has a massive impact on all the asset classes in 2022 and 2023. Last year saw a reduction in value of fixed interest and government-issued debt of double digits. This is almost unheard of. Subsequently, low risk investment strategies performed more like equity-based strategies, which was poor!
Learning from the past
We can review the UK and US markets for experience in what has happened before at times of high inflation and low growth. These often go alongside rising unemployment eventually. In the UK there was the Barber Boom – 1972-74 (1973-75 recession), and the Lawson Boom – 1985-88 (cause of recession of 1990-92).
Commodity prices, including food, raw agricultural materials, and metals, rose initially. Interest rates rose, eventually unemployment rose, and companies went bust in record numbers. Then, house prices crashed, and this was followed by recession.
At the point of recession, house price negative equity was high. Then commodity prices dropped substantially as demand dropped. Further, equities which had initially stagnated started to rise again through the recession (in anticipation of future growth from lows).
Where are we in this cycle in 2023?
Some of the points above are clearly in evidence, but negative equity, rising unemployment and a full-blown recession have been avoided at this time. Although stagflation (explained in Part 2 of this series) in many western economies, and China, appear to be the current position. Investment planning currently must be balanced between the idea of whether western countries will or will not go into recession.
What is different this time is that, for the last 13 or so years, the government borrows and prints money at a huge rate. The borrowing from the US government is being used to encourage liquid capital markets to invest in the US through advanced technologies or similar.
This continuing borrowing of money, and large liquid capital in markets will have to stop at some point. However, it is unlikely to do so whilst 2024 sees the election of a new President.
When the borrowing does stop, and of that we can be sure, then the piper will have to be repaid. To see the extent to which US GDP borrowing has accelerated click here: U.S. Debt to GDP Ratio 1989-2023 | MacroTrends.
See Also:
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