PARIS: Investors are facing up to an economic re-run of 1970s, with rising inflation exacerbated by the war in Ukraine, leaving very few viable investment options.
Speaking at Amundi’s World Investment Forum, Niall Ferguson, historian and senior fellow at Stanford University, said inflation-adjusted returns for the late 1960s to the end of 1970s show only housing delivered positive returns, while equities and bonds barely did.
‘If we are re-running the 1970s, you have to rethink investment strategy quite profoundly. Because the things that worked after the period when Paul Volcker broke the back of inflation won’t work now.’
Another lesson from the 1970s is a global regime shift is a big problem for developing countries, with a combination of higher food and fuel prices leading to instability.
Ferguson said Sri Lanka is the first of many countries that will be on brink of collapse and it is worth remembering that almost every African country relies on wheat from Russia and Ukraine.
Yellow vests around the globe?
Where the developed world is concerned, even if we don’t get to double-digit inflation, US opinion polls point to inflation as the number one concern.
While it may not produce unrest like in developing countries, it might provoke backlash against governments, who will struggle to remain in power.
Ferguson also didn’t discard the possibility that Gilet Jaunes (yellow vests) movement in France becoming a global phenomenon, once the cost of energy transition and Russian sanctions manifest themselves.
He said the majority of consumers understand inflation in terms of higher food and fuel prices. ‘Along come central bankers and say: “Well core inflation ignores those things, let’s talk about core inflation”. But, consumers are like: “Wait, what? These are things we really care about, why do you just take them out?”.
‘The lesson from the 1970s is if you don’t bring inflation under control, it only gets more painful to do so, because inflation expectations get embedded.
‘The Fed the IMF, all the institutions project inflation in the US will come back down to 2% very quickly, in just a few years. If you believe that – I have a bridge to sell you, for quite a reasonable price,’ he said.
Green transition challenge
Speaking about the impact of the war in Ukraine on Europe’s energy transition ambitions, Ferguson said there can’t be a transition from fossil fuels overnight and an attempt to get to a renewables-only economy is doomed to fail.
He said the only way the transition can work is if there is a substantial cushion provided by natural gas and nuclear, which is something policy makers on both sides of the Atlantic need to accept.
This implies US shouldn’t curb the development of its own natural gas and shale capabilities, he said, as the Biden Administration is cutting off Europe’s ability to rely more on liquid natural gas from the US, rather than on Russia or for that matter Middle East.
‘You are not solving a problem of geopolitical stability if you go from relying on Russia to relying on Middle East,’ he said, citing the Iranian nuclear programme as one potential trigger of future crises.
In Ferguson’s view the attempt of Biden’s administration to strike energy deals with Venezuela illustrates the utter futility of adopting a ‘Green New Deal’ prematurely.
‘We can all agree on adopting net-zero energy future, but you can’t get there in just a few years. It is a decades-long project that depends on innovation that hasn’t happened yet.
‘Until those things are in place, there has to be a role for natural gas, there has to be a role for nuclear. If you don’t do that if you are trying to rush to wind and solar mix - you will end up with skyrocketing prices and consumers won’t bear it,’ Ferguson said."
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