Why do we think we are heading towards an inflationary economic slowdown? For several years, iPRO has had as research provider the company Gavekal Research, which has notably developed the following investment model, linked to the economic cycle:
Over the past decade, we have undoubtedly experienced a deflationary boom, with global growth of around 3% per year and very low inflation.
This has benefited innovators such as Apple, Microsoft, Google, Amazon, Facebook, and ASML Holding, one of the world leaders in the manufacture of photolithography machines for the chip industry. To the detriment of more traditional companies, such as banks and industries, relegated to second place in equity indices.
In April 2021, inflation in the United States exceeded 4% and reached 6.2% in October. The highest rate in 30 years.
The FED, which hammered six months ago that this peak of inflation was temporary, has started to change its rhetoric. And it will soon reduce its purchases of Treasury bills and bonds ( tapering ), the first step before the rate hikes.
High inflation is now factored into the forecast. And we see it as a harbinger of a global economic slowdown.
The weight of energy
One of the reasons to believe that high inflation will continue is linked to energy.
Energy production, especially in the two great industrial powers of China and Germany, remains heavily dependent on coal, which is the cheapest primary energy.
Certainly, coal is the most polluting source of energy production. But banning coal can only generate even more inflation in the years to come … Because much less polluting alternative energies also cost much more.
A new element contributing to this global economic slowdown …
What future in the short and medium-term?
In order to anticipate the level of economic activity and therefore the behavior of the markets, it is now necessary to judge future growth rates.
For this, we rely on the following facts:
1. Growth in China, the engine of global growth over the past decade, will slow down by around 2%, under the combined effect of now unfavorable demographics (more retirements than active people entering the labor market), a reduction in US investments, and recurring problems of energy production ;
2. More generally, Governments will make efforts to reduce the mountain of debt accumulated before and during the Covid. This means more taxes which, added to the increase in human resource costs, will reduce the return on investments;
3. Finally, after twenty years of “happy globalization”, a return to economic protectionism seems appropriate. But, as we said, in the context of low returns on investments. Private investments will therefore be below, which will negatively impact the level of economic activity and therefore the growth rate.
How to deal with the economic slowdown?
We must therefore be very careful, favoring alternative investment strategies.
According to Gavekal, cash is the preferred investment during an inflationary bust. It remains to be seen in which currency … The American dollar no longer functions as a safe haven, because of the record American public deficit.
Without a major shift in the US government’s public spending policy, possible havens could be:
- Swiss Franc
- the Renminbi (Chinese Yuan)
- gold or even cryptocurrencies but the latter have the major handicap of being extremely volatile …