Key Points:
- We have had a swift recovery in the markets since June, we were fully invested for that recovery, but it was effervescent and US central bankers are warning it’s not over yet.
- The consumer and employment market around the world is still strong but less excitable. The rising costs of living curbing aggressive spending and pushing people back into work. The larger pool of staff reducing inappropriate salary demands.
- US Shale Oil producers are posting record profits, they will be debt free this year according to Bloomberg and Deloitte. Now focusing on producing liquid natural gas (LNG) (now defined by the European Union as a green fuel), has increased their ability to raise finance for their projects as a green energy producer.
- Central governments are intervening again, from a 23-point plan for economic stability in China to interest rate relief on student loans in the US.
Is it a bullwhip or the ripples on a pond?
Well, it feels like both, in the real economy and the investment arena. I have never been shy of a colourful analogy as it helps communicate often dry data and concepts.
The re-opening of our lives after the pandemic isn’t synchronised with supply chains, the employment environment, where we want to live, where we want to spend our leisure time or where we want to go on holiday, but the world is running hard to catch up. That pressure is inflationary, and it is now affecting the global consumer (that includes you and me).
News cycles are just that, they go round and round.
The recent headlines of 18% inflation are good click bate and when the supply chain catches up and energy pressures fall we’ll have similarly lurid headlines about deflation and recession. Sentiment is driving markets in the short term normally sensible people are hanging onto the next 24 hour news cycle to give us long term investment themes. We have had swift recovery in markets since the June nadir, and we were fully invested for that recovery, but it was effervescent and US central bankers have been warning us all that it’s not over yet. The expected foretelling of doom from Federal Reserve chairman Jerome Powell at the Jackson Hole (Wyoming) Symposium this weekend (25-27th of August- my invite lost in post..45 years and counting) gave the market the excuse it needed to blow off some of that froth….all very ‘entertaining’ but not an investable situation. Anything short of announcing the Zombie apocalypse will be seen as positive and the market will have a good couple of days.
The economic current continues.
Around the world the consumer and employment market are still strong but they are less excitable, people are worried about costs so they are spending less aggressively, those same concerns are pushing people back into work so the larger pool of staff reduces inappropriate salary demands. There will be some bigger than normal wage settlements within government and other large employers, but that won’t become a cycle because incremental change is already happening.
Energy.
US Shale Oil producers (‘frakkers’- sounds rude) are posting record profits to the extent that they will be debt free this year, according to Bloomberg and Deloitte The industry lost fortunes in 2019 and 2020; their ability to raise finance was curtailed by bank boards ESG driven decision to stop lending them money for their projects (good for the planet we all live on). However, they have made so much money in the last year that they can pay off that debt, not just because of the high price of oil, because they have stopped finding new places to ‘frakk’ (couldn’t resist it). However, now that the European union have defined liquid natural gas (LNG) as a green fuel (better than burning coal) and other economic regions follow their lead the Shale Oil producers are focusing on developing LNG assets- banks will be happier lending money to green energy producers…and supply will increase, reducing pressure on pricing over the next year or so, the market will take that into account and the premium will fall in those commodities
Consumer.
We are all still spending money, but as a group we are more cautious. The supply of goods is getting easier and the inevitable glut, as inventories get ahead of themselves, will be good for the January sales or the awful Black Friday splurge but that to will normalise into 2023.
Central government intervention again.
The Chinese have just announced a 23 point plan for economic stability (there’s work to do if you need 23 points), the US are giving their student loan crippled middle class a break on the interest, the European Union have their recovery fund in place and on our shores we’ll re-badge ‘building back better’ in some way- any promised tax cuts are unlikely to survive the Conservative party leadership election.
Portfolios.
We retain our long-term investment views, our low allocation to bonds and overweight to overseas stocks and shares is stable. We have recently taken advantage of the strength in the dollar and converted USD to GBP, we have no outstanding US dollar trades and clients are charged for holding foreign currency. We will be preparing for the move to Royal Bank of Canada as custodian in the coming weeks, we’ll keep the risk profile intact but holdings will be made efficient to support the transfer.
As always any comments let us know- Keith
Important Information
This article is for information only and does not constitute advice or recommendation and you should not make any investment decisions based on it. The views and opinions of this article are those of Casterbridge at the time of writing and may change without notice. Any opinions should not be viewed as indicating any guarantee of return from investments managed by Casterbridge nor as advice of any nature. It is important to remember that past performance and the value of an investment, and any income from it, may go down as well as up and the investor may not get back the original amount invested
