Finance Monthly - May 2022

Fasten your seat belts… this ride has only just begun Inflation has now established a firm grip across the global economy, and whatever teenage scribblers and bank analysts say about it peaking… it feels like it is here for the long term. As we demonstrated in 2008, you can pretty much fix a financial problem overnight by throwing money at it. What we are learning today is you can’t fix Germany’s shortage of gas until we build new infrastructure, which will take upwards of two years. You can throw money at broken health services, but you will only fix them by fundamental reform. Money is not a solution. The financial world and the real world are very different places. The problem is financial models written to explain the complex workings and underpinnings of the financial and monetary economy… we are now discovering they have absolutely nothing in common with how the real economy actually works. Ukraine was the wake-upand-smell-the-coffee shock to energy, food and commodity prices that broke the model. The consequences have overturned everything we thought. We were kidding ourselves about how the global economy works. Sophisticated and terribly clever algorithmic financial models predicting financial outcomes have utterly failed to understand the complexity of the real economy, and just how suddenly cascading consequences ripple-like tsunamis through markets, labour and commerce. Consequences, consequences… Even now, I don’t think Central bankers really understand just how overturned the apple cart of monetary stability has become! The triggers for new real inflation impacting the global economy in terms of energy, food and commodity prices, and the consequences of higher wage demands are all clear, but the underlying fuel that has now caught fire is less well understood. Inflation – which I recently described as “the apex predator of the bond market” – is now very real. Balancing rising interest rates as central banks finally acknowledge it’s a problem while putting in place an inflation aware investment strategy to generate returns while balancing the risks of equity markets versus the security of bonds… well, it’s a tricky optimisation game where you can’t know the actual parameters. One critical point about energy and commodity inflation is how it hit markets as “no-see-ums”. For readers unfamiliar with my market blog, the Morning Porridge commentary, a No-see-um is something so blindingly obvious and dangerous your mind refuses to acknowledge the likelihood until it’s actually happening. Also important is the concept of how an SEP (Someone Else’s Problem) makes us blind to the consequences of what’s occurring around us. Central bankers and economists tell us they watch the whole economy. In reality, they all wear blinkers. Traditionally, a monetarist economist will tell you: “inflation is everywhere a monetary Bus i ne s s & Economy 24 Finance Monthly.

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