The Art of the Deal

Inflation, Money and ‘The Art of the Deal’. In this edition I get almost religious.

Market Commentary

Trump and the World economy - fear of inflation unsettles markets.

Inflation - What's the Big Deal?

Money is a bit like religion – people need to have faith in it ever since it ceased being backed by commodities like gold and silver.

The money we use now is known as ‘fiat’ money (not the little Italian car) – fiat money means money mostly created by governments.

This is the tricky bit – to keep the faithful, faithful, there needs to be the right amount of money - too much and the excess money chases a limited supply of goods meaning prices rise – uncontrolled inflation results. Too little and prices stagnate, and we get deflation – meaning people hang onto their cash because stuff will be cheaper tomorrow.

Both are bad.

If there is no confidence in a country’s currency, then money will flow out of that country, investors and industry will not invest, lenders will not lend. Central bankers are the high priests of money unless (God forbid) politicians interfere with them – they turn the taps on and off, but markets in the form of commercial banks also control the flow of money.

Both Adolf Hitler and Vladimir Lenin may not have been reading from the same hymn sheet, but both realised the importance of faith in money – Hitler had counterfeiters produce millions in Sterling intending to drop it over the UK to de-value Sterling and thus cause inflation - luckily the Luftwaffe was too busy with the RAF. Vladimir Lenin had similar ideas, not liking capitalism he used the Russian mint to flood his country with high value notes to erode the power of capitalism and cause inflation – both understood the value and power of money.

From the above it is clear that having confidence in a country means having faith in its currency – and the value and stability of said currency. For now, the Dollar remains the World’s reserve currency.

Bond markets and Trump: I have noted that if inflation is expected lenders will not lend. Treasuries (sometimes called bonds) are loans to the US Government – bit like our Gilts. These loans are traded in markets and are paid back over a number of years. If inflation takes off the value of the future interest payments lessens and this, in combination with falling confidence in the US will lead to a bond market sell off. This was the first kickback from markets leading in turn to Trump’s partial U-turn on tariffs.

SUMMARY

Donald Trump is taking on World economies and we feel that this is a bit like taking a knife to a gun fight, just ask Messrs Truss and Kwarteng whose unfunded tax cuts affected the UK Gilts (bonds) markets and had overseas impact. Our view is that the markets will prevail – of course President Trump might later try to portray all of this as simply his negotiating strategy – ‘The Art of the Deal’. Let us hope that ‘The Donald’ does not cause lasting harm – we don’t think he will and indeed when the markets prevail it might provide a lesson to those who eschew the saying about the sum of the whole being greater than its parts. In the meantime, we are watching carefully to see if we need to re-position client portfolios for the longer term.

p.s.

I personally have suffered from inflation for years but with inflation affecting the price of beer one type of inflation may now cancel out the other. Son number one (James) on the other hand controls his own inflation challenges by consistently standing behind me when I am at the bar.