Daily Commentary

MarketMinder’s View: Here is an interesting development: A supertanker owned by a Japanese oil wholesaler (and sailing under the Panamanian flag) successfully crossed the Strait of Hormuz with 2 million barrels onboard, and according to the Japanese government sources quoted here, it didn’t have to pay Tehran’s mooted toll. “According to the report, the tanker had been anchored off the coast of the United Arab Emirates for more than a week before it began sailing through the strait on Monday night. It had reportedly loaded crude oil in Saudi Arabia in early March.” This shows us a couple of things that are worthwhile from a supply standpoint even if the oil now in transit is merely one day’s worth of Japanese consumption. One, given the tanker loaded in March, after conflict broke out and when uncertainty was highest, it seems oil activity in the region hasn’t stopped. Two, the situation in the Strait appears to be more complex than simplistic headlines and soundbites imply. It may be hard for individual people to see through the fog of war, but markets are pretty good at sussing these things out.

MarketMinder’s View: Lots of timeless wisdom here, with pearls about innovation, the wonders of compound growth and the importance of getting an early start on investing. Given this takes the form of a letter from the author to his new grandchild (congrats!), it starts with a look at how the world has changed since his own grandparents lived during Victorian times, with all the invention and growth powering investment returns. Indeed, it would be folly to presume that all stops just because society has some challenges today, especially when you take off the rose-tinted nostalgia glasses and remember society always has problems, many times far larger problems than today’s. Investing in stocks and reaping the compound growth they generate is the best way to capitalize on all of this. Yet too often fear gets in the way, so we think this bit is especially salient: “According to research by my colleague Marianna Hunt, the last quarter century has seen British households reduce the proportion of their financial assets held in investments from 23pc to 17pc, while increasing the proportion held in cash from 19pc to 35pc. That represents a massive and misguided flight to safety, which has cost them a life-changing amount of money. During this period, global stock markets have outperformed the returns on safe but unrewarding cash by a wide margin, despite a couple of periods of heavy losses. Marianna compared two savers who both started in 2000 with £5,000 and added £1,000 a year for 25 years. One of them lost their nerve after three years of losses and transferred what remained of their investments into cash at the end of 2002. The other held firm and stayed the course. The first investor-turned-saver ended up with just over £38,000. The more courageous, stay-the-course investor accumulated nearly £153,000.” Not that we advocate buy-and-hold, but even if you participate in bear markets, it isn’t the end provided you also participate in bull markets.

MarketMinder’s View: The Bank of England (BoE) voted 8-1 so stand pat today, with economist Huw Pill the lone dissenter preferring a quarter-point hike. This article is a good recap of policymakers’ reasoning and reports, which indicate to us they made a wise decision for some wrong reasons. We guess that doesn’t totally matter for now, but it indicates flaws in the Bank’s thinking that could lead to errors later. Positively, it seems policymakers weren’t tempted to hike rates in direct response to higher energy costs, conceding monetary policy is powerless to solve. Right-o! Energy prices are set globally, and rate hikes can’t increase supply or solve transit bottlenecks. That happens more gradually and, again, globally, as producers adapt. Where we think the BoE runs aground is in its analysis of the second-order effects, the risk of higher energy and petrochemical feedstock prices filtering through to broader consumer goods and services prices. It determines this risk is minimal for now, which we agree with, but it cites a weak economy where firms have no pricing power and workers don’t have the clout to secure the wage hikes it deems necessary to drive broader inflation. It also draws a contrast between now and 2022, when energy prices’ spike coincided with hot inflation: “‘Relative to the previous energy shock of 2022 [after the start of the Russian-Ukrainian war], currents events were occurring from a starting point of lower inflation, weaker demand, a looser labour market, and a restrictive monetary policy,’ the Bank said.” So what is the problem with all of this? One, we have decades of data showing wage growth follows inflation—it doesn’t lead it. Wages were slow to catch up after 2022, then slowed well after inflation rates eased. Two, you can’t logically compare economic growth rates now with early 2022, considering the UK was still rebounding from COVID lockdowns at that point, with a depressed base skewing growth rates higher. Three, while money supply is indeed growing more slowly now than it was before 2022, today’s monetary environment doesn’t look restrictive to us. UK money supply grows at healthy prepandemic rates, and the yield curve is nice and steep. All this points to the UK economy likely growing better than expected. But without surging inflation, because of the aforementioned tame money supply growth. Absent surging money supply, higher costs force households to make substitutions, curbing demand for other goods and services and counterbalancing the price pressures from higher input costs.