Financial markets are really challenged
The Manila Times
Covid-19 pandemic, whereas presumably, the economy should already be bigger than it was preCovid-19. These developments are imbalances that point to continued inflation. Therefore, it has surprised me that some in the financial markets suddenly believe that the US Federal Reserve will change its plan and hold back on the interest rate increases. One of the arguments is the pretty big drops on Wall Street the past few days, but it is precisely the imbalances in the labor market in the US that should lead the central bank to stick to its plan. I am more surprised that a measurable part of the financial markets can change its expectations in just one week, but it is a challenge to deal with the currently high inflation. My own conclusion is therefore also based on the fact that the inflation monster is multiheaded, which means that I have a primary scenario as I see the world right now, though it can spiral off in different directions. Part of my position is based on the current journey across a piece of undescribed land combined with the experience I have gathered for more than 30 years in the financial markets. In my professional work, I have advised many companies that have had significant activities in countries with high inflation, which means that one has to deal with the economic reality that high inflation triggers. Moreover, I had my start in the financial markets when the German central bank, the Bundesbank, completely dominated European monetary policy. It was personified by the head of the Bundesbank, Karl Otto Pöhl, who headed the institution from 1980 to 1991. At that time, the central bank had its full independence, which was marked in between, and the Bundesbank had never ended up in the hopeless situation that is similar to what the European Central Bank is facing today. The German central bank also dealt intensively with inflation, and one could learn a great deal from it, if only willing to. The short lesson from the Bundesbank at that time was that inflation must be there, but one must never just let it go wild, because inflation is perhaps the most destructive economic force that exists. The problem is that one cannot just try a little bit of high inflation, burn its fingers and then decide that it’s not wanted anymore — once high inflation is let out, it’s just so difficult to get it back into the bottle again. I have listened to, and studied, the many arguments that have been brought up just over the past two weeks regarding inflation and economic growth. I stand by my primary scenario, namely that inflation is currently creating its own natural economic response to imbalances in the economies. Especially when the output remains squeezed, and therefore, price increases continue until the demand drops. However, there might be an escape to avoid the recession. I expect the cost of living in the Western world to rise so much that some consumers will be forced back into the labor market again or forced to work more to pay the bills. If this scenario is fulfilled, then there is an implicit end to the high inflation period, as the wage pressure should be reduced and corporate output increases. This development belongs to a part of my primary scenario, but when this part of the development will materialize is very uncertain, and as to whether it will happen before the recession arrives, I don’t know. Before then, I expect continued fear in the financial markets, especially for the risk of recession, as well as the uncertainties arising from the high inflation and the continued interest rate hikes. Peter Lundgreen is the founding CEO of Lundgreen’s Capital. He is a professional investment advisor with over 30 years of experience and a power entrepreneur in investment and finance. Peter is an international columnist and speaker on topics about the global financial markets.