Inflation in 2022 – Banking Crisis 2008

Looking back and looking forward from November 2022.

This quick note is to share thoughts on the market.  Although, remember of course, that we have no crystal ball and so these thoughts are nothing more than informed opinion.

Inflation control is an extremely inexact and, to be frank, brutal affair.  Raising interest rates “cools” the economy, but if the economy is not “hot” then it forces a recession.  Recession, or the shrinking of the economy, reduces spending and that forces prices down.

The risk of “runaway” inflation is considered so great that it is better to force the economy into recession.

At the moment, the world as a whole is moving towards recession, which is a moderately unusual situation, as in the past the countries / continents recessionary cycles would be less in sync.  Another strange symmetry is that the different investment classes such as bonds, gilts and equity have also been moving together.

We think that it all goes back to the global recession of 2008 that followed the banking crisis.  That problem was navigated by various national banks pumping billions and billions into their economies – quantitative easing – or in old fashioned parlance – printing money. 

Printing money is well known for creating inflation, but it didn’t, not for over a decade.  In the end prices were given an upwards push by the global supply chain crisis triggered by the Covid and exacerbated  by the Ever Given Suez Canal crisis.  Added to those “supply side” price increases Putin’s war in Ukraine forced oil, gas and wheat prices to skyrocket.

In the UK, which is a big economy and has a considerable influence on the global economy, the impact of Brexit disrupting our trade balance and the debacle of the Truss “mini”-budget have contributed further to the malaise.

2008 was a global banking crisis and the response was global.  Covid was a global pandemic, and the impact of the Putin’s ambitions are global as he fights militarily in Ukraine and economically with oil and gas supplies.

Added to those real supply side issues, although the tech sector stepped into the breach to support homeworking during Covid had created a bubble of positivity in 2021, sadly that has been bursting during 2022 as working practices reverted and the global economy started shrinking.

All these economically negative factors make for a bleak outlook and overall, they have, and they are supressing sentiment, across all classes and in all markets.

At KGJ we invest in well established, well regulated markets and we turn to fund managers with a proven track record in our chosen classes and markets.  We are not immune to the waves of changing sentiment, but we are investing in real businesses with real customers providing real products and services. 

It has been tough this year, and although we are not through it yet, the interest rates have risen, the many nations falling into recession show they are working, and strong braking pressure is being applied to inflation. 

Once inflation tops out and interest rates stop rising the market will change direction.  The inflation will have reduced the overall burden of debt, green energy solutions will be rapidly developed to end reliance on fossil fuels for climate reasons and to prevent the economic warfare that has blossomed in 2021.  In Europe, Ukraine will have to be rebuilt, and around the world wages will catch up with inflation.  All these factors will directly and indirectly boost the emerging bull market. Nobody knows the future, but we are hopeful that the damage of the 2008 banking crisis will at last be behind us, and a new normal will be able to emerge and establish in 2023-24.