The end of the low volatility goldilocks stock market environment has been unnerving for investors, but it has also triggered a fascinating debate amongst economists and market strategist about where we may be heading from here. As a result I have had the dubious pleasure of having to analyse and read even more than usual, although at least it has been more stimulating than the previous endless musings whether markets had once again fallen into a state irrational exuberance – or not.
I can report that there is a fairly broad consensus supporting our view that the economy is in a more stable position of synchronised global growth than it has been for a very long time and that this is most likely going to continue, although most expect (or perhaps hope?) at a slightly slower rate than of late.
There is also a growing consensus that the prolonged era of stall speed growth and ever further falling inflation, yields and interest rates is ending. I thought our colleagues at MRB Partners – one of our independent investment research providers – put it rather succinctly in their latest article: The world is not on the verge of returning to the inflationary 1970s, but the mediocre and choppy economic landscape, combined with no inflation and hyper-accommodative monetary conditions, is gone. The same is true of the heady days of ever-falling interest rates and yields, and ever-rising asset prices.
The last bit is where the discourse between the different sides starts.
The bears argue that higher volumes of debt make the global economy so vulnerable to rising yields and interest rates that the return of even mild inflation of around 2% marks the end of this economic cycle.
The bulls on the other hand argue that this cycle is only just getting started as we finally return to the old ‘normal’, where companies are at long last deploying their plentiful capital to expand their productive capacity through higher productivity rather than relying on short term ‘hire and fire’ staffing strategies. This should keep persistent inflationary pressures arising from staff shortages at bay as CapEx investment driven productivity gains are finally returning to facilitate falling unit labour costs even as wages rise. As long as this doesn’t lead to an overheating of economic conditions, we could indeed hope for the goldilocks era of cheap capital transitioning neatly to the next goldilocks era of productivity gain driven growth.
