😱What’s Really Going On With Inflation (And Interest Rates) But If You’re Feeling Overwhelmed, It’s Time You Zoom Out!

We’ve got loads on our plate right now. We’ve emerged from a pandemic (thank heavens!) only to find ourselves grappling with the soaring cost of living and seemingly overnight, we were thrown into investment chaos. From rate rises (that probably should’ve happened long ago) to dangerous debt, sticky supply chains and stupidly stubbornly high levels of inflation. We’ve got it all. And trust me, there’s plenty more where that came from! 

For anyone who’s invested in markets right now know it’s not an easy ride. Whether you’ve been investing for decades or a mere few months, no one’s cool with what’s going on. People who have been in markets for years and years and years tell me they’re slightly freaked out – though I suspect it’s a little more than they’re letting on! Honestly, no one has a clue what’s going on – least of all central bankers whose literal job it is to know what’s going on or at least use their brains (and endless forecasting models) to figure it out. But they’re behind the curve. And markets (along with all of us, I suspect) have cottoned on. 

Looking at central bankers ‘trying’ to tame inflation is like watching a fireman throwing a teeny bucket of water over a raging fire that’s engulfed an entire apartment block. Nice effort but the fire is still there. The trouble is that this fire ain’t straightforward. If they put out the fire (inflation), they run the risk recession (house collapse) which could be worse, though is kinda already happening! Though read here why recessions aren’t that scary & what you can do to take advantage. But leave inflation to its own devices and this could get real ugly real quick. If it hasn’t already.

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Where’d inflation come from anyway?!

Inflation is the result of two things (I know, I’m being overly simplistic here): the first is money printing. 1 in every 5 dollars sloshing about was created during the pandemic! We had more money chasing a finite amount of goods. It’s plain old supply and demand, actually. But then, we also had lockdowns. In out, in out, shake it all about. As a result of this Hokey Pokey-ing supply chains were in shambles. And prices started going bizarre. Suppliers were jammed and simply couldn’t keep up with our demand.

While I think these two forces were mostly responsible for the horrible price rises we’re seeing now, you’ll notice that fuel and food are going up more than most. Here in the UK, our food bill is expected to be ~15% higher by the summer. Sheer madness. And fuel? Diesel’s almost at £2 a litre! While the war in Ukraine had something to do with it, cast your minds to a little before that and you’d have remembered that fuel prices were already on the rise. You can’t shut down these things and then expect no chaos to follow when people suddenly start living again. But the war in the East definitely compounded this problem. So when Russia went and invaded Ukraine this sent prices spiking. And, well, here we are! 

Why taming inflation is tricky this time round

With inflation that’s almost at 10%, the Fed (and other central bankers) can’t just lump us with equal measures of rate rises because they’ll throw us all under the bus. The metaphorical recession bus. And governments, clearly, don’t want to run the risk. Plus, with all their levels of debt (after having printed roughly $3 trillion during covid), high inflation is good news since it erodes the value of their debt. Italy’s enjoying this one!

But bankers can’t go on like this. Much as they’d like their debt to be washed away by inflation, it’s the people – you and I – who end up paying for the whole party. Free, no-strings-attached money doesn’t exist. It has very real consequences and boy are we feeling them now. So banks are suddenly realising that they’ve gotta action. The Bank of England is set to raise rates to 3% by next year. They’re already at 1.25% which is a far cry from the 0.1% that we saw two-and-a-bit years ago.

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If you’re anything like me, reading the news is something you’d much rather avoid these days! But I’m too curious. Ever heard the saying ‘curiosity killed the cat’? Well curiosity killed something – my optimism for things ever returning to normal anytime soon. So, I stick to my daily routine of devouring the finance and business sections despite my inner self yelling at me not to. Soaking up all that’s wrong in the investment universe right now.

It’s time to zoom out folks and see the bigger picture

But we’ve been here before. Not me, obviously. But our economy and markets have been there, done that. Time and time again. Markets are yet to break, for good. Hint: don’t worry, they won’t. Markets have had all sorts of nasty things happen to them and guess what? They’re still here to tell the tale! Since 1999, markets alone have had to deal with the dotcom boom and its painful bust, the global financial crisis, the eurozone debt crisis, a pandemic and now this, whatever you wanna name it!

If you wanna turn the clock back even further, our markets have survived two world wars along with countless other ones (including the one right now), asset bubbles, many financial crises and loads more. Markets are more resilient than we think! 

I got talking to a fund manager who was telling me what it looked like in ’08. His workers thought they’d be left jobless. That the stock market would cease to exist. He told me how one guy was totally convinced that valuations would go to zero. Zilch. Nada. That just shows how bad things were looking. Financial institutions that had been around for donkey years (like Lehman Bros) suddenly fell to their knees. But do you know what? Financial systems were nursed back to health (thanks, Fed) and they mostly made it out alive. Global markets started to recover and it set the loose monetary conditions and liquidity injections set the stage for the whopper bull run that the US so enjoyed.

The circle of (business) life

And now, well, it seems like it’s all coming undone. But markets can’t keep going up till infinity and zombie companies have to die. It’s natural and part of the cycle. Recessions wipe away bad businesses, leaving only the fittest. Many think this is the dotcom bust part II but technology is vastly different now to what it was back then. Back then, companies with no revenues we’re not even talking about no profit, zero revenue guys(!) were able to go public, and suck money only to flop like a pancake.

But don’t get me wrong, we’ve got something else going on. Massive debt levels for starters (the size of the US balance sheet is $9 trillion now), high inflation, soggy growth and the tricky tightrope that the Fed has to talk: raising rates will dip us into a recession but leaving inflation as is it is clearly not gonna work.

Companies are laying off working (Coinbase laid off 20% of its workers and loads of other tech companies are either having a hire freeze or laying people off. Confidence is not great. We’re entering a period of contraction. Not to mention that the Fed is (finally) embarking on quantitative tightening: aka reversing all that money printing stuff. 

Think about it. For years we’ve had cheap, no-strings-attached money and then came covid which meant this stuff went on steroids. There was money flying everywhere. And not just that, but money became cheaper too. Interest rates are basically the cost of money: the lower they go, the cheaper money gets. Debt becomes cheaper (you pay less on the interest) and companies can pump up their valuations to the sky. 

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Things are now changing and the Fed’s realised (a little too late) that they’ve gotta reverse all that. Interest rates are lagging inflation and it ain’t pretty. The issue is that them – and us – have become so used to the stimulus that weaning us off of it isn’t going to be easy. Hence the pain we’re going through right now. 

But know that this too, shall pass. 

For those of you who, like me, have only recently begun investing (for me, it’s been a piddly two years) what’s going on right now can feel a little more than a chapter in history! It feels like this chapter is the entire book. Of doom.

If you’re able to zoom out, to appreciate the market downs along with their ups then you’ll be able to keep your call and even invest during these times. 

Know that what got us here won’t get us there yet the principles still stands: long-term investing works. Every time.

Think in decades not days and zoom out.

On that note, try not to agonise over the doom and gloom too much. It could end costing you your financial future.

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment