Since the beginning of 2022, we have seen:
- Two European nations fighting a war for the first time in 80 years
- Inflation in most Western economies at levels we have not seen since the early 80s
- Unpredictable behavior by the government of one of the largest economies in the world
- The commencement of the first central bank rate hike cycle since 2015, and the first one reacting directly to inflation since the 1970s
One can argue that all these events are related, which begs the question: has the global investment environment which we have grown accustomed to over the past few decades fundamentally changed?
The current generation of investors have lived under a set of assumptions: Falling interest rates. Globalization. Declining tax rates. All these trends are deflationary. What if they all changed?
Inflation and Interest Rates
This chart represents annual inflation rates in the United States, Europe, the United Kingdom, and Japan over the past 30 years.
Causes of inflation vary across the world. In Europe, inflation is based in the rapid rise in food and energy prices. Western Europe has become dependent on Russian gas, and much of Europe and Africa depends on Russian and Ukrainian wheat. In the US, inflation is rooted in a combination of massive pandemic stimulus setting fire to the economy while the Federal Reserve stood by, unwilling to douse the flames. Globally, all economies are grappling with pandemic-related supply chain constraints.