The Panel met up once again following a fascinating but equally precarious six months in the financial markets.
Since the regime change that began during the pandemic, the Panel had been in agreement about inflation being on the horizon and not being ‘transitory’. Now that it has arrived, there was disagreement over whether we are living through a cost of living crisis or entering an inflationary boom period. Nor is there much clarity on the paths of a steep rise in rates now or for a decade of financial repression. With the amount of debt around, a government forcing up rates would induce a recession. Therefore there is a political balance between dealing with inflation and minimising defaults. It may take many years (as in the 1970s) before there is the political will to fully extinguish the inflationary flame, due to the harsh recession that would surely follow. If we are in an inflationary boom, why would the government instigate a recession? And if we are in a cost of living crisis, it feels likely as soon as the recession hits and inflation temporarily comes down, the political will for high rates will evaporate. It is worth remembering the inflation of the 1970s was only tamed when rates remained at high levels even during a recession.
As noted above the Panel does believe there has been a regime change in the financial system. Therefore it was generally agreed we should look to own what has underperformed over the last decade. This includes telcos, if we believe markets will become more rational and governments will allow a reasonable return on capital. Additionally, the next decade could well be defined by a Cold War with China and increased government intervention in the economy (both of which would cause the regime change to continue for longer). Consequently it follows to look for businesses that have been hurt by outsourcing to China and/or those that will benefit from increased government expenditure.
Angus Tulloch, Peter Hollis, Russell Napier, Ally McKinnon, Glen Finegan and the Kennox investment team.