Opinion Welshcake

Welshcake

Amid the tempest besetting financial markets, it’s easy to overthink the big picture and forget fine margins. But these could be pivotal as those attempting to steer the behemoths of the global economy face decisions that will chart our course for the rest of 2022.

Talk about big things from humble beginnings. Without this Lottery-funded museum, few people would know that the fastest and most iconic spaceship in the galaxy was built by petrochemical engineers in a Welsh aircraft hangar.

Sci-fi is well and truly on my mind, having just watched a rather different work to The Empire Strikes Back, but one deserving to resonate as widely. “Everything, Everywhere, All at Once” is my favourite film this year, with mind-blowing conceptualisation and messages about what is important in life. It’s a deeply warming exploration of everyday concerns wrapped in the language of an ever-forking multiverse.

Lie here and live with the consequences

One might hear every Manchester United manager say this to his players since old Sir Alex. Man City and Liverpool ran the 2021-22 Premier League campaign neck-and-neck as mutually respectful masters of these moments of truth, while the game’s former titan has lapsed into a source of shame even for people who formerly hated them. Pundits decry a ‘gulf in quality’, but Man United could easily have gained 15 more points by being marginally more bothered.

One might wish someone had said the same line to central bank policy committees last year. We are living with the consequences of them repeating past mistakes by failing to move fast enough on rates. The question becomes whether the Fed and others now go big and deliver the pain upfront or continue piecemeal with successive smaller hikes — potentially into a major economic downturn by year-end.

If you had to choose only one thing to cut through the noise of persistent inflation, rising consumer costs, recessionary signals and geopolitical risks, rates stability would be the one to go for. And this is where central banks are again behind the curve. If you know you must hike by 75bp over the next few months, why not do it — then pause to monitor results?

Yes, it’s disruptive in the short term, but the shutdown of economies in the pandemic demonstrated it’s better to suffer up front, turn a corner and allow a bear market rally. Investors need something like this to cling onto in what looks set to be one of the worst years on record for total returns. It’s hard to gain purchase when no-one can see the end of the ladder — or the steps.

My only caution is what a rate hike might do to real people out there already worried about meeting their mortgage payments. This is a developing problem, not just in the US but in places like Ireland, which had 80,000 homes in arrears during the pandemic and already faces the highest mortgage rates and debt per capita in Europe. Even the seemingly on-fire UK residential market has 8% of renters in arrears, one in 10 people spending half each month in the red and one in 20 its entirety.

Nevertheless, US consumers in particular have not cut their bottom line in the past until they have been forced to do so. They keep buying gas as oil prices rise, and they deplete savings or run up debt on retail purchases until it becomes unsustainable. At least now job markets are strong, and pursuing a regime of successive cuts into recession risks achieving maximum bleed when consumers and economies are at a much weaker ebb.

“The only thing I do know is that we have to be kind,” says the same character in the film. “Please, be kind. Especially when we don’t know what’s going on.”