This inflation crisis has changed the world and asset prices forever, and will lead to a structural break and a fundamental shift in the way things work, writes Christopher Joye.
This has been the year of the great regime change or inflexion point – call it what you will. The search for yield is dead because lofty risk-free interest rates on cash, and cash-like investments, are suddenly plentiful.before hefty transaction and maintenance costs, when term deposits offer a superior rate of return?
The absence of a decent risk-free rate of return rationalised the proliferation of numerous high-yielding, and often more illiquid, income solutions in equities, property, and fixed income. And the illiquidity was appealing precisely because it concealed the much greater underlying risks. Even in listed equities, there is a case that cyclically adjusted price/earnings multiples are still far too high and not fully pricing in the global recession that is bound to come. To be sure, equities have likely adjusted to the change in discount rates – it is, however, unlikely that they are reflecting the retrenchment in future earnings growth.
Perhaps the more interesting issue is what surprised in 2022. Our biggest miss was not anticipating that high inflation wouldthat would transform preternaturally dovish politicians that always want cheaper money, into interest rate hawks. Our main conviction for next year is that the economic and financial impact of the interest rate shock will be worse than people think. Central banks are implacably committed to engineering the slowdowns required to crush the strongest consumer price pressures in 40 years. This means job losses, defaults, corporate closures, and much weaker wage growth.that have thrived on the availability of cheap credit for decades without actually having the earnings to service their debts.
Crucially for investors, this means that all asset prices need to adjust permanently lower to reflect higher interest rates on cash. And it means that investors should not expect the ebullient bounce in asset prices that they became accustomed to seeing in the post-GFC period.
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