The Notebook: George Lagarias on why we’ve all been asking the wrong question about inflation
Where the City’s movers and shakers get a few things off their chest. Today, George Lagarias, chief economist at Mazars, takes the pen to talk inflation, films and Winter Wonderland.
2024: The year when everyone is asking the wrong questions!
Markets are currently asking two questions: When will inflation fall, and when will central banks cut rates? The City’s brightest forecasters gaze into their crystal balls, uber-analysing every word uttered by every Fed official splitting hairs in a way that would drive even Greek philosophers mad!
But, as investors clamour for answers, analysts seem to be parroting questions that are manifestly wrong. The fact is it’s not about “when”, as much is it about “how”.
Let’s assume that US inflation falls from 3.5 per cent to 1.8 per cent by March. Is that reason for the Fed to cut rates abruptly? The answer is simple: “yes”, if the course is linear, and “no” if it is not. What matters, is not “when” inflation falls, but “how”.
If the drop is linear, then it can be assumed that it’s sustainable and that inflation can stay below two per cent allowing central banks to cut rates quicker. If the drop is volatile (one upside surprise for two downside surprises), then policy decisions will likely be different. “Team Transitory” central bankers feel that they lost their credentials as inflation-fighters in 2021. They will not risk sharp rate cuts until they are certain.
In fact, markets may be focusing too much on rates. In the past 15 years, bonds and equities moved on quantitative easing. Currently, the opposite function, quantitative tightening (QT), is taking place. It is difficult to fathom a sustainable Bull Market with the Fed still sucking liquidity from the system. Investors are currently too focused on rate cuts, casually assuming these will be followed by the end of QT. However, this is not necessary. The end of QT could come quicker, as central banks fret over the levels of bank reserves, which are reduced as long as QT lasts.
We have been driven to a guessing game of “when” rates and inflation will fall. As investors, there are more important, and easier, questions to answer. Starting with the “how”.
Is this a crazy world?
My senior economist and I heartily debate the state of the nation. He maintains things are normal-ish. There have always been wars and disruptions and an econometrician can’t predict any of that. Therefore, he thinks he should ignore them and focus on models and trends. I insist that we haven’t seen so many disruptions (trade and actual wars) at the same time, plus high rates, inflation and a severe challenge to the American capitalist model of running the world. The question of the year I propose is: Is this a crazy world, or just normal?
Some habits die hard…
When I’m not in the London office, I work from my home in Athens. I am one of the few who remained mostly remote even after the pandemic – going on four years now. It’s amazing how one can keep with the Covid-era routines for so long. Housework, regular exercise, treadmill, constant diet, clear boundaries between work and family, Teams calls all day, all part of a strict regime to be productive… and maintain my sanity. I’ll probably return to London normality first chance I get though. Nothing beats normal.
…others not so much
Over Christmas I visited Winter Wonderland with my five-year-old daughter for the first time since 2019. Not a mask in sight and packed as ever! The return to normality is no surprise. Humans adapt. I had always thought the pandemic would leave scars. I was wrong. Although we haven’t forgotten, it seems we are more determined to enjoy life without fear even more than before. If anyone is wondering why consumption is holding fast, despite even inflation, we need look no further than the lockdowns.
A film recommendation
The Hunt for The Red October (1990)
The 1990 classic spy thriller based on Clancy’s novel, features Sean Connery as a Soviet captain of the world’s most hi-tech submarine, defecting to the US with the help of an American, Alec Baldwin’s first portrayal of Jack Ryan. The reason I love it apart from being immense and immersive (pun intended) pop-corn fun, is that it reminds me of how complex a Cold War and a multi-polar world are. To better understand today’s geoeconomic fragmentation one needs only to go back a few decades ago, when spies, backdoor deals and a race for technological supremacy defined the world, while markets simply enabled. Connery as a Lithuanian skipper and “chess expert” in an impeccable Scottish accent is a massive bonus.