Gerard Lyons: Outlook for the UK and Europe in a changing global economy
The key issue facing the UK, Europe and the rest of the world right now was the end of cheap money, Lyons said. Low interest rates were appropriate after the 2008 financial crisis but had continued for too long.
This caused a number of problems, including rampant asset price inflation, with markets not pricing properly for risk and the misallocation of capital. It created the environment in which inflation has surged in the past couple of years. Recent shocks – the pandemic and Ukraine – came from nowhere, but the transition away from cheap money has been painful.
Despite this, and the need to be cautious about the near-term outlook, Lyons was
not too pessimistic. He pointed out that the size of the world economy was $32 trillion at the beginning of this century. The evening Lehman Brothers went bust it was over $100 trillion and this year it is going to be over $100 trillion. Following a plethora of financial crises and the pandemic, the world economy has bounced back and is quite resilient. Western Europe and the UK are set to grow at a sluggish pace this year, probably avoiding recession, Lyons suggested.
On inflation, Lyons noted that the Bank of England initially believed that inflation was going to pass through quickly and it was going to be temporary. The view from Netwealth was that inflation was going to persist. All of this points to interest rates likely remaining at a higher level than the markets and central bankers expect.
Jeffrey Cleveland: What investors are getting wrong right now
Cleveland picked several narratives, or ‘memes’, which he had encountered during 2023. The first meme was to do with inflation. Payden & Rygel is a bond specialist, and he noted how bond traders and bond investors were very attached to the last three decades and because of this, they do think inflation is going to come down. He agreed with Lyons and Napier that this is not going to happen.
The only time inflation has come down quickly in the last three decades was if you
had a recession but now central banks will step in to forestall any contraction in credit. This means inflation will be kept from coming down much more quickly. Cleveland suggested that recession is not inevitable in the US, even with the Silicon Valley wobbles, because the Fed has stepped in so aggressively. He also suggested that interest rates had not peaked, at least not in the US.
Interest rates will not peak until they have reached the terminal rate from the Fed and he was not confident that this had been reached. He felt that the Fed would keep hiking because of this and we may not have seen the peak in bond yields.
Russell Napier: Capital management in an age of financial repression
Napier opened his remarks by observing that everybody realised the world has changed and it has changed.
Taking a sweep of financial history, the period which is relevant to the current situation is the period between 1945 and 1979, because we had a very similar problem then that we have today: namely, too much debt, and this needs to be addressed.
Napier suggested that we are in a much worse position than at the end of World War Two, at least for the US economy (where currently debt stands at 264% of GDP). Could we therefore follow a similar solution and inflate away the debt? Napier believed that the level of inflation today is accidental, in other words caused by policy mistakes and policy errors. But ultimately, inflation is necessary to bring down the US’s debt-to-GDP ratio, which had been falling in the last four quarters. The US has had exceptionally high nominal GDP growth and at the same time, interest rates had to be kept low (i.e. nominal rates cannot be set above inflation).
Returning to reflect on the 2008 financial crisis, Napier noted that the system didn’t fall apart and isn’t allowed to fall apart. He remarked that the least likely thing to happen today is a Lehman Brothers event because governments cannot handle the fallout from this type of event. If things look as if they are falling apart, every single depositor in an American bank would be made good going forward. In the UK, 2020 witnessed the biggest recession since 1707 and bankruptcies went down because the government ensured a flow of credit from the banking system to anybody who wanted that credit. This is the ‘new normal’, Napier said.
