THE annual symposium for central bankers in Jackson Hole, Wyoming was back in full force over the weekend or from August 26 to 28, 2022. The stock markets felt its full returning force when US Federal Reserve (Fed) Chairman Jerome Powell once again stated that he will raise interest rates until demand and growth subside in the United States.
The European Central Bank (ECB) is traditionally somewhat less outright in its communications, but a couple of ECB representatives at the symposium in Jackson Hole did indicate that the rate hike is coming, and it is only a matter of whether the interest rate rises by 0.50 or 0.75 percentage point on Thursday, Sept. 8, 2022.
It is clear to everyone that inflation is raging in the US and Europe, but there are clear differences in both situations on each side of the Atlantic. The US economy is back, in a potent version with a too low supply of labor, which is why the US central bank is so aggressive with its interest rate hikes. The Fed is only looking to cool down the economy, and I am confident that it will succeed.
Here, the central bank is ready to take a recession into the bargain, which clearly worries investors. The Fed has acknowledged that it did not understand the strength of the US labor market, nor the extent to which people were leaving the labor market. It has become clear now, and my expectation is that the US economy will get back on track through the current tough monetary policy cure.
The ECB does not need to raise interest rates to cool the economy because the recession will probably come on its own. With this, the eurozone once again risks exposing the structural economic problems that plague what is currently one of the world's largest economic zones.
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This is where self-awareness starts to come into play, and it will be particularly interesting for investors to follow how the decision-makers in the eurozone/Europe deal with self-awareness and solutions to challenges.
I have noted that, from the political side, it is often mentioned that the high inflation is due to Russia's war against Ukraine. Immediately, my position is that such statements should be taken with reservation. Global commodity prices have gone up since the Covid-19 pandemic paralyzed a large part of the world in the first quarter of 2020, though the price increases didn't show the slightest acceleration after Feb. 24, 2022, the day of Russia's invasion. This shows that rising inflation has been in the works for a long time. In my estimation, the reason was the numerous shutdowns in the business world combined with the fact that purchasing power was maintained, this phenomenon was pronounced in Europe and the US.
It is also noteworthy to add that crude oil is now trading at a lower price than before Russia's invasion of Ukraine, the same applies to petrol in the spot market in the US. The price of petrol at the pump in the US is 8 percent higher than at the end of February, which is partly seasonal, but not dramatic either.
Europe once again ends up with a self-inflicted problem. With the former German political leadership at the helm, the security policy was thrown out of control in order to get cheap Russian gas, the consequences of which are now being seen.
At the same time, the European leadership has focused heavily on so-called green energy, which is good if it is genuine green energy. But decision takers failed to accept the objections of experts from the conventional energy sector (like oil production). The experts have pointed out for years that there is underinvestment in conventional energy production, which means that additional energy cannot be produced if it becomes necessary. Furthermore, the warning has also been that due to underinvestment, conventional energy supplies will not be sufficient until 2030, when green energy is expected to have gained the necessary capacity.
As mentioned, economic history shows that self-awareness is needed before the decision-makers can work on solutions toward the origin of inflation — I don't know if that will be the case in Europe, but from a risk point of view, I currently assess that the eurozone/Europe is the economic zone where there is the greatest risk of similar spontaneous inflationary extremes for the rest of this decade, primarily due to the risk of spontaneous energy crises.
Although I am often critical of the ECB, even the most imaginative monetary policy will not be able to cope with this kind of inflation risk. It will be interesting if the ECB brings this theme to the fore, as this would be a fully justified concern for a central bank.
Peter Lundgreen is the founding CEO of Lundgreen's Capital. He is a professional investment advisor with over 30 years of experience and a power entrepreneur in investment and finance. Peter is an international columnist and speaker on topics about the global financial markets.