ITS THE ECONOMY STUPID

I think central banks have got it wrong again. Higher rates are having very little real impact. Employment remains strong and consumer spending robust.

Central banks expected monetary austerity would crash the economies. The resultant recession fixing inflation. “Hard or soft landing” being the debate.

Yet long-established empirical facts are that private sector consumption and investment (except property) are not that sensitive to changes in the rate of interest. Consumption is “inelastic.”

That doesn’t mean it won’t change one day. It just means change is normally slow.

When I read statements from recent reporting U.S. CEO’s there is cautious optimism about future demand. Despite higher rates. That confidence explains the employment environment. This may change if we get continuing rate rises. 

But inflation is falling. Inflation was a supply issue. Covid bottlenecks have all but been eliminated. Ukraine skyrocketed oil and gas. But both have settled at lower levels. We are almost back to pre-Covid conditions. Regarding inflation, therefore, two of the main causes of it have now been almost resolved. Yes, food remains a supply issue. Wage pressures are present but modifying.

One story has started to end and another is beginning. 

How do we pay off all that debt? 

Answer can only be growth. Long live inelasticity and cautious optimism or confidence. Both corporate and consumer.

Global equities offer long term value.