High oil prices push up costs for both households and industry. In economic models this feeds through as higher price inflation, which is why markets expect central banks to stop cutting rates and possibly raise them instead. But the rise in oil prices is structural, and raising the cost of borrowing has no effect on the oil price; it simply adds another layer of cost for households and industry. Consumption would be squeezed from two directions, most likely leading people to spend less. Raising rates in an overheating economy is one thing, but doing so in the current environment would produce a range of negative consequences that politicians and central banks have little appetite to cause. The more likely response is the opposite: unfunded stimulus to artificially suppress prices such as fuel costs. We do not foresee rate rises ahead, even though the expected rate cuts have been put on hold given the considerable uncertainty that prevails. We will see both monetary and fiscal stimulus deployed to prop the system up.
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In a world where presidents change their position every other day, there is enormous scope for algorithmic trading. This type of trading is powered by vast computing resources and thrives when a constant stream of news causes markets to swing sharplyup and down. The algorithms pick up keywords from presidents, for example, and take short or long positions depending on what the news is expected to mean for the market.
If algorithmic trading is a nuisance, it is arguably worse that insider trading in the United States appears to be taking place entirely in the open, with no regulator bringing meaningful enforcement action. Those in the innermost circle around power are enriching themselves by accessing market-moving information before it becomes public. Trading on such information is prohibited under normal circumstances, but it now appears that no one can resist the extraordinary power these decision-makers hold. This is nothing less than blatant kleptocracy at the heart of a democracy. The consequences of this corruption, inadequate oversight and self-enrichment of the inner circle will, as always, one day lead to a complete collapse of trust. A breakdown of trust in the political and financial system could have far-reaching effects, and it is important that we keep this trajectory in mind when assessing future events and their impact on financial markets.
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We are also seeing the early signs of a stress scenario. Several funds with exposure to private credit in software companies have faced such large redemptions that they have been forced to halt further withdrawals. Insurance companies in particular appear vulnerable if this unravelling spreads. We are not there yet, but this is something that could trigger a cascade of further consequences and still more outflows from illiquid funds holding assets that are difficult to value at genuine market prices.
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It may be early, but make a note in your calendar now for Nordic Funds and Mines. AuAg will as always be there in full force, and you will also have the chance to meet several of our portfolio companies. Do not miss the year’s premier mining event on 15 to 16 October in Stockholm at https://nordicfundsandmines.com/ and we hope to see you there! More details on how to register will follow in due course.
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