In July 1881 a group of fishermen set out from Gloup, one of the northernmost villages on one of the UK’s northernmost islands, in small six-oar sailboats – sixareens without a bridge.
It didn’t go well. The number of fishing boats around the Shetland Islands had been steadily increasing – and whereas a few decades earlier all fishing was done close to land, men now sometimes had to travel 40 miles to get a good catch. .
Too far for such small, difficult to handle boats. On this occasion, they were over 20 miles away when a surprise storm hit. Ten boats were lost in the extreme wind and the high waves that followed: 58 men died, 34 widows were left behind.
You can, if your UK vacation takes you to Yell Island, visit the village and its miserable memorial to what became the Gloup disaster.
Watch out for a wave of inflation
If you are an investor, you can immediately see the relevance of Gloup. No more easy pickings? Tick: The S&P 500 has doubled since its first pandemic lows. Take more risk in search of diminishing returns? Tick: Valuations in many markets are reaching historic highs. Put yourself in a position where a destabilizing event could have devastating long-term implications? Tick: A real bear market (unlike the high speed dips and rises of last March) will destroy the retirements of older investors.
What then could be the wave that sweeps your investment portfolio? For me, the one you should really watch out for is inflation. I last wrote about this in June, thinking it might be less transient than most economists. So it’s proven. In the United States, the consumer price index moves at an annual rate of 5.4%. In the UK it is 2%, but the Bank of England predicts it will reach 4% by the end of the year.
Several factors explain these increases – problems in supply chains, rising energy prices, etc. But sustained inflation is usually due to rising labor costs. And here there is no lack of danger signs.
The latest ONS UK labor market statistics show 953,000 vacancies in the three months of May to July, for example. This is the highest recorded and 21% higher than the pre-Covid number. Are these predictions of the pandemic ending in mass unemployment? It will not arrive. Anyone who wants a job can have a job. Maybe two jobs.
So it’s no wonder that the annual growth in average weekly earnings is on the rise – 8.8% in June. Part of it is nothing more than a function of fun numbers; job losses around the same time last year tended to occur in low-wage sectors. Therefore, while it makes sense for average wages to increase (you deleted the low numbers), it does not follow that individual workers see their wages increase.
Those coming off leave will go on temporary pay lower than their old rates and that will be reflected in the numbers as well. Look at it like this and maybe the momentum will soon be lost, especially as some 4% of the national workforce remains on at least part-time leave.
I am not so sure. Even after major transient hacks, economists estimate the underlying number at 6.3%, much higher than it has been for some time.
Repressed demand responds to supply constraints
Demand growth is also on the way: hotel production is 8% below its February 2020 levels. That will change – and in an environment where there are already 73,000 vacancies in accommodation and hotel services. catering and no one to provide them.
Thanks to a drop in migration and a possible shift in the value we place on our leisure time, creating a ‘huge increase’ in the economically inactive population, the UK workforce is no longer as large as it is. was, notes Deutsche Bank. Overall, there are almost 800,000 fewer employees in the UK than in February 2020.
The story is similar in the United States, where some 27% of companies say they plan to raise workers’ wages (the highest since 1989) and where desperate employers are offering headhunter prices at levels record. If these companies follow through, expect that “the already well recognized cost effects of rising raw material prices, transportation costs, semiconductor shortages, etc. will soon be reinforced by the hike. wage costs, ”explains Professor Tim Congdon of the University of Buckingham.
Either way, not only do people now still have a large chunk of their pandemic savings cushion, they also have more money in their pockets. Could they continue to spend even as companies have to raise prices to cover costs? The pent-up demand could continue to respond to supply constraints that could push up prices, which could then encourage workers to organize more in their demands for higher wages. Hello vicious circle.
All of this could of course subside (and, to be clear, raising wages and shifting employee power to more power is not in itself a bad thing).
But they also might not – and that means danger to the stock markets. The past few decades have been brilliant for businesses and for investors. Taxes, interest rates and most costs have come down – and margins have gone up.
Costs now appear to be rising – and interest rates and taxes could easily follow, suggesting lower future profits and justifying lower stock prices.
It’s hard to imagine a catastrophic bear market in a world where money is printed. But the way stock prices have fallen sharply this week following a mention from the US Federal Reserve that it might start thinking about a little less loose monetary policy should serve as a reminder that it is possible. And it’s a reminder to check your risk levels. After all, it’s been shown time and time again that owning very expensive stocks at the end of a bubble is roughly the equivalent of being 20 miles offshore in six arenas when a storm hits. It is best to stay in sight of the land.
• This article first appeared in the Financial Times