Quarterly newsletter, December 2021

Where the inflation came from

Despite hopes we were through the worst of it, the year ended with the Global economy refocussed on Omicron and its unique challenges. Financial markets ended the year running out of reasons to move higher and finally inflation has become real again. Over the last 10 years, Quantitative Easing (QE or money printing) has not brought inflation with it – a fact that has puzzled many. The reason is previous rounds of QE have primarily gone into the financial system and therefore into asset prices - inflating them.

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It has made us feel wealthier but not increased everyday prices all that much. This time however, during the pandemic rounds of QE, approximately $1.6Trillion has been sent directly to consumers in the U.S. alone– who have spent it, to create broad excess demand repeated across the globe. The result is the inflation we are now seeing. Supply chain issues, stock shortages, price rises despite populations being ‘locked down’ are examples of real world impacts.

Omicron is only exacerbating the issues. Commentary from the U.S. Federal Reserve in December said it would remove QE over the next 3 months and then Fed officials expect 3 increases in the rates this year from the current 0-0.25% target to around 1.0%. In slight contrast and behind the curve, the Australian RBA said they would not consider scaling back QE until the bank’s next meeting in February 2022, insisting rates remain on hold at 0.1% until 2023.

The market anticipates a rate rise in Australia later this year anyway. In our view, we are experiencing the type of inflation that central banks will react to. Given the size of the shift in policy settings, they will react slowly, so as to not crash the economy, but will increase the cost of capital until inflation is under control again. For investors, interest rate rises won’t be enough to make term deposits attractive, but it will deflate speculation and bubbles.

It will require us to focus on quality assets that can withstand a higher cost of capital. Returns for the 6 months are below

  • All Ordinaries: 7779, up 194 points or +2.57%
  • Listed Property Accumulation Index 69750, up 8959 or +14.74%
  • 90 Day Bank Bills 0.06%, up 0.03% or 100%
  • AUD vs U.S. Dollar $0.7258, down 2.1cents or 2.83%
  • UK FTSE 100, 7384 points, up 374 points or 5.33%
  • Dow Jones Industrial Avg, 36338 points, up 2093 points or 6.11%

Guardian Investments Pty Ltd ABN 18 608 506 261 is a Corporate Authorised Representative of Guardian Associates Pty Ltd AFSL 238281. This page reproduces commentary published in December 2021 and is general advice only. It has not been tailored to your objectives, financial situation or needs, and the figures were current at the time of writing. Past performance is not a reliable guide to future returns. Seek personal financial advice before acting on it.