Events, bogeymen and Rip Van Winkle

In a recent blog I recalled high levels of price inflation in the 1970’s. The trigger for them was the external shock of rising oil prices. These pushed up prices and transferred wealth from oil consumers to oil producers. But if you needed oil, whether in a refined form such as petrol or diesel, or as an input for an industrial process, you needed it and had to pay the price.

Now walk through the looking glass.On 20th April 2020, the price of US oil became negative, i.e. producers had to pay to put oil in store, because demand has slumped in the wake of the coronavirus pandemic. Whilst oil prices quickly moved back into positive territory, they remain around 70% down over the last year.

Ordinarily, in a free market, a rise in price would be expected to reduce demand for the product, and vice versa. Here, the options appear more binary:

• You need it and will pay whatever the producers demand; or
• You don’t and won’t buy any however low the price falls.

Naturally, the real world is much more complex than this, not least because geopolitics feature massively in the oil business. However, the point is to illustrate the classic bogeymen for all investors at any point in time; prices out of control and economic depression. These are permanent hazards, which most investors will seek to try and protect themselves against, so far as possible.

In response to great financial crash of 2008-09, and the current economic crisis, incomprehensible amounts of money have been pumped into the global economy by central banks to stave-off depression. This was one of the lessons learned following the Great Depression of the 1930’s, when monetary deflation was allowed to happen, at a time when unemployment was rising, with disastrous consequences.

Given all the uncertainty, investors might be tempted to follow the example of Rip Van Winkle, and sleep for ten years, by which time the crisis and its after-effects may be just a distant memory.

However, in reality, likely structural and cyclical changes, in part forced by acceleration of technological change, make it vital, in the oft-quoted words of Wayne Gretzky (the Canadian star hockey player):

“go to where the puck is going to be, not to where it is”

Sound advice for investors but, without a clear vision of what the world will look like when it emerges from the biggest peacetime crisis to affect capitalism, it is nigh on impossible to know where the puck is going to end up. So perhaps staying awake would be the wiser course.

For most of our clients, the real concern is what happens to the cost of care, i.e. how much carers’ earnings will rise, rather than price inflation or deflation. Like other key workers, carers are under the spotlight at the moment, as being essential but poorly paid. It will be interesting to see whether one effect of the current crisis is to revalue the contributions of such individuals, and to resume the raising of skills and qualifications which could provide significant upward pressure on pay.

Those with ASHE-linked periodical payments have the best possible protection, whatever happens.