For the first time in two years we are pleased to report the Panel was able to meet in person, and we hope that this will continue to be the case going forward.
Over the course of those virtual meetings the spectre of a return of inflation had dominated most of the discussions. We now met with inflation having moved to its highest level in decades and asked where do financial markets go from here? We quickly moved from whether this inflation was a temporary blip (as no one in the Panel had enough conviction to argue that that line) to why the markets did not appear to be pricing the inflation in. Gold is one area the panel felt should have moved more given the increase in inflation. To the panel it looks that the inflation debate has become ideological. If you are a Keynesian you would say there is no link between inflation and the rate of money growth, and would use the last 20 years as evidence of this. This line of thinking believes the increase in money growth does not mean there will be inflation beyond this transitory phase, and in fact the levels of money growth must continue so we can fund post-pandemic stimulus. However the stakes are high as the longer this strategy prevails the stronger the inflation will be, if the link between the two does still exist.
TInflation will also impact politics. Currently it is popular with stimulus and low interest rates. But as the cost of living increases there will be a turning point where it becomes more politically popular to rein in inflation. One should follow the politics for when significant tightening will occur.
Japan was put forward as one market that looks attractive in this scenario. Companies there tend to have strong balance sheets, are relatively lowly valued and it is an economy where there is no inflation. An additional tailwind could be a new Cold War with China, diverting capital and trade flows to Japan.
Peter Hollis, Russell Napier, Ally McKinnon, Glen Finegan and the Kennox investment team.