Looking back at the last decade 2010-20, three elements combined to create a positive environment for risk assets.

  1. Cheap money – interest rates were no higher or lower than inflation.
  2. Cheap labour – employers had a full labour pool with less pressures to increase wages.
  3. Cheap energy – Europe had Russia and the US had fracking/shale.

ALL of these are currently gone, apart from US energy!

But that does not mean they cannot return.

1) Energy – if Russia pulls back from its current mission to have no global allies at all, holds its hands up to the Ukraine invasion being a horrendous mistake and starts the long process of mending relationships, energy prices fall a lot.

Putin it appears is very ill, so he has little time left and desires to retake Ukraine for history to see him as another Alexander the Great. That isn’t going to happen now. The war continues to prevent Putin’s humiliation.

If a peace is found and energy relations are restored with Europe then this winter will be tough, but the longer term European crisis is averted and Germany gets to keep a motor industry.

2) Labour – The great resignation post Covid has left all developed economies short of labour. The areas most affected being leisure and hospitality.

In the last 6 months, 3 separate Artificial Intelligence (AI) projects have had major breakthroughs – creating fully functioning computer programming, journalism, art and media content creation. It’s mind boggling what computers are doing and so far beyond human abilities already.

The fear even 5 years ago was that robots and AI would replace all menial labour and there would be mass unemployment.

The opposite is likely true.

The most skilled in society could be replaced very quickly; the surgeon, writer, lawyer, accountant, programmer, et al.

As an example of what has proved beyond AI replication; the cleaner. It’s so complicated to programme all the variables, even though we see it as relatively unskilled it’s harder to replace than what we see as the most skilled.

So look for wealthy countries to quietly reintroduce higher immigration.

3) Interest rates. Plainly inflation is a huge issue. The reality, although the official numbers are not reflecting it yet (because they lag) is that most elements of the inflation basket are reducing significantly or showing outright deflation.

What are the problem areas?

Shelter – the figures going into current inflation numbers are 6 months old. It’s coming down in all the most current surveys fast.

Food – is most affected by energy prices.

Energy – remains high while Russia/Ukraine is unresolved and this is the difference making the difference but falling as economic activity slows.

Central banks raise rates to choke demand to kill inflation. That’s the current play book.

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.