Page 18 - DIY Investor Magazine | Issue 29

INFLATION – THE LATEST FAD OR THE THEME OF THE FUTURE?
Whether inflation will rear its head in a sustained way remains the big question for investors - Callum Stokeld, Kepler Trust Intelligence
In 1859 Abraham Lincoln, in one of his less prescient calls considering that whole ‘civil war’ episode that followed, recounted the classic fable of the Eastern monarch who, desiring to soothe his anxiety and depression, requested his wisest advisers engrave an idiom onto a ring to which he could turn for comfort.
This being pre-lockdown, why, in the search for wisdom and anxiety-relief, he didn’t simply head down to the pub like the rest of us remains unanswered, but the advisers supposedly came back with a ring engraved with ‘this too shall pass’.
Generally this has been taken to be a fable, but there is a growing school of thought that suggests it is in fact a solid basis for economic policy.
Federal Reserve chairman Jerome Powell, for example, has
in his press briefings repeatedly expressed the belief that inflationary pressures are transitory; they too, shall pass. Clearly he has acquired the legendary ring.
In some respects, he is likely correct. We may be commodity bulls in general, but the base effect of the COVID-19 crash means the read-through impact on inflation of, for example, a c. 66% year-year increase in the S&P Industrial Metals Spot price index or a 61% increase in the AGRI INDEX (to 27/05/2021), is highly unlikely to be repeated at the same rate on an ongoing basis.
Cyclically, higher inflation expectations typically boost ‘value’ style investing relative to growth or quality, as discount rates are adjusted upwards and more immediate sources of value realisation become more attractive.
‘REPEATEDLY EXPRESSED THE BELIEF THAT INFLATIONARY PRESSURES ARE TRANSITORY; THEY TOO, SHALL PASS’
A lot of market commentary around potential market rotation currently revolves around nearer term pressures. What, however, is the outlook for structural inflation?
Cyclical factors undoubtedly remain important, but sustained higher inflation will likely require demand-led inflation as well as supply constrained. Wage inflation will undoubtedly be important in this regard. Developed economies are, after all, driven by consumption. Capitalist economies should see the marginal choice of the consumer drive efficient selection of superior products and services.
However, when marginal propensity and ability to make consumer decisions falls, productivity should ipso facto decline as price becomes a greater determinant than
value in consumption decisions. Demand-led inflation will require consumers to have marginal propensity to determine consumption choices.
Karl Marx averred that capitalist cycles ultimately led to increased concentration, monopolistic practises and the eventual collapse of capitalism as too great a share of production was retained as profit but reinvestment would be unable to generate returns and yet would remain too extractive to be sustained.
‘ALL OF A SUDDEN VALUE-FOCUSED INVESTORS... WILL BE ENJOYING STRUCTURAL TAILWINDS’
DIY Investor Magazine | Jun 2021 18