Email of the day - on the potential for inflation to surprise on the upside or the downside
Comment of the Day

June 08 2020

Commentary by Eoin Treacy

Email of the day - on the potential for inflation to surprise on the upside or the downside

Greetings Eoin. Firstly, thank you for the daily commentary and Big Picture Long Term view. They remain the highlight of my weekend and are greatly appreciated. I’m interested in your comments regarding future expectations of inflation.

I hope I’m summarising you accurately, but in essence the thinking runs that the provision of vast amounts of monetary liquidity from Central Banks, combined with Government fiscal spending will at some point come home to roost, and drive up inflation.

If so, why then did we not see an inflation spike following the 2007/08 GFC, where massive (at the time) injections of liquidity and fiscal spending should have delivered the same result?

One view is that we did get inflation following the GFC, just that it showed up in asset prices, not in consumer prices. Equities, bonds, property, luxury goods, art and even later on precious metal prices all benefited from the increased liquidity following 2008. As you have previously highlighted, massive advances in technology, changes to the way we work and live, outsourcing of jobs to lower wage economies, and historically low interest rates have all combined to keep consumer inflation in check over the same period.

Are we to assume that this time is different, and we should expect consumer price inflation at some point, or is it safer to expect history to rhyme and that inflation will again show up in asset prices? If so, should we presume the liquidity will chase better returns and lower P/E multiples of Europe and Emerging Economies this time around? And finally, when investing I’m always conscious of the wise words from the famous British Economist, John Maynard Keynes “The market can stay irrational longer than you can stay solvent”. Spoken nearly a century ago, and never more relevant than today! Many thanks for your time

Eoin Treacy's view

Thank you for this important email and your kind words. The global response to the 2008 global financial crisis was to bailout the sinners, and pass the bill on to savers. The massive liquidity provided and increases in government debt loads the bailout entailed, saved the global economy. However, it also exacerbated inequality, because, as you highlight the inflation benefitted the holders of financial and physical assets. The coronavirus has laid bare that divergence and it is fanning the flames of left-wing populism.

Click HERE to subscribe to Fuller Treacy Money Back to top