As the old insurance advert used to say: “We never make a drama out of a crisis”. It is a message which seems to have been lost in the UK in the past few days as, with a quarter of all our HGV drivers having suddenly seemingly disappeared, gone AWOL, our national distribution network has apparently collapsed. If last year in lockdown we were mass panic-buying loo roll, tinned tomatoes and pasta, now it is a rush for diesel and unleaded to keep moving.
There are many contributing factors in a complex situation as the national and global economies stagger through the recovery phase from Covid: the natural cycle of older drivers leaving the industry but their new replacements suffering long waits for training and application processing by a DVLA largely working from home, still running on pre-unlock protocols and a reported backlog of 50,000 unattended applications; some foreign drivers have gone home after Brexit; undoubtedly some mischief-making by haulage leaders and the media facing down the government amid headlines redolent of 1974. Yes, there is a shortage and pressure in the system, but collapse? Not at all. As a journey along any motorway will reveal, the roads are still packed with big lorries on their busy delivery schedules.
Not only a British crisis
But if it has all the hallmarks of a uniquely British farce, the reality is we are far from alone in suffering labour shortages, not only in haulage but other sectors too, as the dislocation arising from pandemic mitigating measures and the subsequent release of pent-up demand for goods and services throws sand in the wheels of just-in-time inventory and supply chains which are so short and so precise that all resilience has been bled out of the system. Similar labour shortages (or in many cases the wrong labour in the wrong place, or a lack of suitably qualified labour, given most economies are still nursing unemployment rates higher than pre-pandemic, and many still have significant numbers on furlough) are apparent in the US and on the Continent. The knock-on effects reveal themselves as frictional costs impacting economic recovery rates, while simultaneously shortages of materials, goods and labour helps push up prices. This is the very essence of “stagflation”, the economic phenomenon combining inflation with stagnant economic growth that will be familiar to anyone brought up in the 1970s. Tip in to the mix rising energy costs, stroppy unions flexing their muscles, persistent worries about the unreformed NHS falling over again this winter and a government at sixes-and-sevens about how to deal with it all, there is little surprise that headline writers revert to Shakespeare’s opening lines in Richard III, “Now is the winter of our discontent…”.
China: is anybody home?
But if you want to see a real throw-back to 1970s conditions and the lights going out, turn to China. On top of the credit squeeze described in previous columns to deflate the housing market bubble (the straw which broke the back of Evergrande), and to help cool the economy, China is now suffering an energy crisis arising from a critical shortage of coal. Some sources say national stocks are as low as only 18 days, a situation exacerbated by a recent lull in renewable energy production (wind and sunlight are variable) and the effects of rapidly rising gas prices for its gas-powered plants. Factories are being forced to close for 20 days a month on rotation which, given the importance of China as an exporter of critical components and goods, can only lead to a spreading impact for the broader global economy. It is now widely assumed that China will see virtually no economic growth in the second half of this year and may well be in recession in the fourth quarter, possibly extending in to early 2022 depending on how it is able to reverse its energy crisis. It is a significant political risk for General Secretary Xi: free-market economies might totter in periods of disequilibrium, but that is not supposed to happen in a communist command economy; and as Core, Helmsman of the People, Xi is in sole charge and therefore has sole responsibility.
Central banks in a cleft stick
Whatever political challenges there are, the situation presents a pretty problem for the major central banks too as they find themselves in a cleft stick. On the one hand, strong inflationary pressures which are showing signs of becoming enduring rather than merely transitory, scream “raise rates!”, not least to mitigate against the corrosive effects of increasingly negative real interest rates. On the other, the dislocation and disruption and the stuttering global recovery say that now is absolutely not the right time to be thinking either about tapering quantitative easing (QE) or raising interest rates.
What is also abundantly clear is that were we to talk ourselves in to a second global recession, the central banks would be on the ropes; while there are many technical complexities to monetary policy, essentially there are only two principal levers at a central banker’s disposal: 1) pump in liquidity through QE (a strategy already demonstrably on the law of diminishing returns economically), and 2) flex interest rates. But rates are already at zero (negative in the eurozone); that lever is at its maximum limit on the arc of effective travel, the Fed in particular having been adamant that negative rates are not a viable option. The risk is that central banks would be going to war with half their armoury unavailable.
The language from the principal central bankers, Powell at the Federal Reserve, Lagarde at the ECB, Kuroda in Japan and Bailey at the Bank of England, is to hold a consistent line: this is a bump in the road, it’ll sort itself out, the inflation pressure is transitory; keep calm. But you can tell that behind the microphones and the podiums, they have all their fingers and toes crossed because they are in trouble if they are wrong.
Clean, sustainable, reliable energy? Go nuclear!
Finally, as if it were not obvious already, the current energy crisis crystallises the significant challenge to global leaders at COP26 next month in Glasgow: how to create secure, reliable national energy generation in a carbonless world; literally, how to keep the lights on. We have witnessed the extent to which Russia can weaponise gas supplies, it has its customers in a vice; China, a first world economy (the second largest in the world, 18% of global GDP) has just shut down half its production; the wind does not always blow, nor does the sun always shine and it relies heavily on imports for fuel. By all means have a diversified portfolio of power sources, but the only logical way forward is nuclear as the principal source of clean, reliable energy. For years, in too many countries politicians have lived in a state of funk about nuclear power; if the autumn 2021 global energy crisis teaches us anything it is that now is the time to bite the nuclear bullet.
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
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