The financial markets aren’t unlike every other aspect of society. They go through eras. In baseball, there was the dead-ball era, and then the live-ball era. In sports cars, there was the hot-rod era. In movies, there was the film-noir era, etc., etc., etc.,
Well, the same goes for the financial markets, too. Back in the 70s, we all remember the era of high inflation and uneven growth — yes, the dreaded era of stagnation (which, by the way, many economic observers are hoping we can avoid today!). Recently, since about the 1990s, we’ve had an era of very low interest rates, which led to growth, but also to some bursting of economic bubbles.
Catching up with inflation
Now, according to Mohamed El-Erian, chief economic adviser of financial services for Allianz, we’re entering into a new era: one in which the world’s central banks are trying to play catchup with inflation rates that are topping 8% or more, by increasing interest rates to levels not seen since, you guessed it, in past eras.
In this new era, according to El-Erian, bubbles are no longer a worry. However, what is worrying is the extent to which central bank can deal with in inflation. On the plus side, says El-Erian, the rather undisciplined times involved with near-zero interest rates are over. On the flip side, however, is the question of how much more disciplined central banks have become, whether it’s been enough, and what can be done in the near future.
Opportunities always exist
El-Irian believes that there are three tests to determine if central banks, such as the US Federal Reserve, are dealing with inflation properly. The first is whether financial conditions have tightened. He says yes. The second is whether the tightening has been orderly. He says it’s been “slightly disorderly.” And the third and final test is whether the banks are getting ahead of inflation instead of reacting to it. On this score, El-Irian believes things have to change.
Of course, the effect that inflation has had on investment markets has been significant. However, as has been a point of emphasis on these pages, even in tough or uncertain markets, successful investors can always meet or exceed their investment objectives if they create a sound plan with reasonable objectives and don’t overreact to market uncertainty.
ASCEND GRP is an asset-management firm, with offices in Toronto, Richmond Hill, and New York, that services clients seeking investment opportunities worldwide.