The horrific situation in the Ukraine has prompted a lot of inbound calls on the subject of inflation, inflation hedging and real estate. I have a history of publishing premature inflation hedging advice so I will resist the temptation to pour out my heart ... please see earlier threads on this subject on this site ... or reach for Jim Reid (vintage 2018)...


The point of this note is not to boost Jim Reid's reputation for foresight (he already has plenty of fans and followers - moi included) or our past perspective ... but rather to highlight some analysis produced by our advisers TSL that is spot on. They make the following interesting points:

1 - 1970s inflation spike flowed from the one-off devaluation of the US$ in 1971 - the US$ deval (of 20%) repriced the entire commodities complex overnight and, as it represented a reference currency devaluation, it was quickly recognised as a permanent change in the price level. It also undermined the world's faith in the reference currency that had additional geopolitical consequences (which rumbled on for nearly a decade).


2 - At the time the US Fed (and the other major central banks) couldn't decide whether it made sense to increase aggregate demand to lessen the real impact of energy prices rise (i.e. boost incomes) or to tighten policy modestly and allow energy price inflation to slow the economy naturally. They vacillated and the net effect (given the boomer demographics below) was a boom that boosted real incomes and validated the price effect - this went straight into wage growth. Without the anchor of gold, this further destabilised the US$. The rest, as they say is history.


3 - The inflation effect persisted for nearly a decade - until Mr. Volcker choked it off by jacking real rates in 1981 and, most importantly, re-established the concept of central bank credibility.


The UK went through all of this ... but on steroids .... the UK currency was already struggling after multiple devals in the 1960s and the UK validated prices in the 'Barber boom' in 1972 - that in turn led to an even bigger set of problems in the mid/late 1970s. That said the UK then is not the UK now and as someone that actually remembers the 1970s ... I think this FT/JP Morgan headline is a little rich...

BTW - the bible for what this looked like in the UK RE market is Peter Scott's book - 'The Property Masters'.

The point is that for people that are really thinking about inflation - understanding the cause/effect is important, as is the subsequent policy approach to any shock. Simply screaming 'stagflation' and then heading for the hills is not an effective response. The lessons of the 70's suggest that in the event of a 'one-off' shock to prices than threatens to unanchor inflation, then policy makers have to quickly affirm a 'tightening bias', drain the punchbowl and allow inflation to squeeze real incomes... it might seem harsh but it is better than reprising the Volcker Fed!


The tightening bias has been affirmed and the punchbowl is already being emptied. Real incomes will therefore feel the squeeze. The question for investors then becomes around managing the risks of being wrong ... if you are worried ... then remember that typically people cluster around real assets ... because stocks/bonds don't hedge the risk...

I am travelling to the West Coast next week to see clients and for my first proper conference in 3 years! And as ever available for calls...

Simon