Investing successfully shorter term is super hard. Why? Nobody knows what’s going to happen next.

But just occasionally if you’re paying close attention it’s possible to be fairly certain what’s coming.

If you look at the graphs below they illustrate for the U.K., US and EURO ZONE the movement of Core PPI (producer prices) and CPI (consumer prices).

You will see that the two lines pretty much match exactly, but the CPI lags a bit (moves slightly behind).

PPI has fallen off a cliff and CPI is set to follow.

Inflation is leaving the building and fast.

What we know therefore is that interest rates have been pushed very high by Central Banks to throttle back on inflation and wage growth. Central Banks want to see inflation falling but equally employment numbers weakening and wage awards being lower.

This is happening already but will be turbo charged in the next few years by the adoption of AI technology.

The current estimates of productivity gains from incorporating AI increases by over 50%. This is going to mean a reduction in workforces in enhanced areas if overall productivity is maintained of 30-50%. This gives you your employment market weakness and the removal of employees’ negotiating power to push for higher wages.

Where’s money to be made?

Medium to longer term this is fairly obvious. Rates come down, liquidity gets pumped into the system, more debt gets put on Central Bank balance sheets and assets go up especially those with secular tailwinds such as technology leaders. The boom in productivity from AI will mean higher profits and lower costs so returns could be pretty decent.

Shorter term if rates are going to come down in the next 6-9 months due to falling inflation, the opportunity looks to be in buying high quality credit with current yields of 5-10% available. 

As an example, the iShares 15-year Gilt ETF is down around 40% paying a yield to maturity of 4.8%. If interest rates go down in the U.K. the value of the fund goes up and you get paid around 5% to wait in a rock-solid asset.

If you go up the risk scale to higher yielding debt, then the current returns are around 6% on average from a conservatively managed global portfolio and 8% plus on high yield. Some debt investor funds are yielding 8% plus, which can be bought with a sterling hedge to protect against currency risk (the pound getting stronger against the dollar for example).

We have added debt funds to the portfolios from the rebalance to take advantage of higher yields on the market.

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Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog, and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.