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How to invest in an environment with rising inflation and unpredictability of central bank policy

How to invest in an environment with rising inflation and unpredictability of central bank policy

Investors received a rude wake-up call from a central banker this week. It wasn’t Jerome Powell (Federal Reserve chairman) or Andrew Bailey (Bank of England boss). Lael Brainard will be taking over as vice-chair at the Fed.

Tuesday’s warning was made by Sheryl on quantitative tightening. QT is the Fed’s selling of bonds under quantitative easing. It will begin earlier and be more aggressive that investors expected.

Why is this important? Brainard was widely considered a dove by the US president Joe Biden when she nominated her to the vice-chair position. She was often criticized for being a dove who would favor loose monetary policy and occasionally favored modern monetary theory (MMT funding public expenditures via unlimited money printing). So much for that.

Markets are awakening

You might be imagining that we are headed for a repeat of 1980s with Fed interest rates pushing well into double-digit ranges to crush inflationary pressure. However, it is worth noting that the market has yet to test the central bank’s resolve.

The current news headlines are very grim, and there is a lot of volatility in oil markets. However, the truth is that global stockmarkets haven’t done so badly this year.

The S&P 500 dropped by approximately 13% from its recent high in 2022 to its latest low in March. It was a correction (down by more than 10%), but not an bear market (down by more than 20%). Since then, it has rebounded by approximately 7%, meaning that its only down around 7 % for the year.

It might be difficult for investors who have been trained to buy the dip, however, it is not a huge fall. It might seem positively miraculous in the context a major war in Europe, high consumer price inflation and rising interest rates.

However, this sudden urgency to address inflation does not mean central banks are too late. One sign that the markets are taking inflation seriously is the fact that bond prices have fallen (and yields have risen), but gold has performed well.

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A person rides a camel, with another trailing behind, in the desert

In recent years, rising bond yields has meant falling gold prices. (Gold pays no interest, so if bonds yields rise, they should become relative more attractive). But they are now separating. Louis-Vincent Gave, Gavekal points out that the fixed-income and gold markets are both sending the same message: portfolios don’t need to be afraid of deflation.

Fashion is no longer fashionable

Investors have to deal with rising inflation and a less predictable Fed. This is not an environment that is easy to invest in. Keep to tried-and-trued principles: Buy cheap and buy things you understand. The age of novelty is over, and the return to good old-fashioned investing is upon us.

John Chambers, for example, examines the limitations of technology in the insurance sector and recommends that you look at traditional Lloyds of London insurers.

Dominic examines the reasons why gold-mining stocks are doing so poorly relative gold on page 18. He asks whether this will change soon and how you can make a profit.

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