When the central bankers aren’t up to their job: think about strong liquor…

Last week, Bank of England (BoE) governor Andrew Bailey was talking about rising food prices being “apocalyptic”.

He also explained that the BoE was helpless against the uncontrollable inflation problem hitting the UK.

Given that the BoE’s mandate includes an inflation target of 2.0%, this is a very worrying development.

Inflation is now over 9% in the UK and the BoE is only now predicting that it’s going to head into double digits.

What has gone wrong? What has the BoE been up to? Where does the buck (actually the quid) of responsibility stop, if not on the governor’s desk?

The BoE blames a lot of the current inflation problems on the war in Ukraine. Well, that’s a cop out. It’s a pitiful excuse from a bunch of people who are smart, but not as smart as they think they are.

Inflation is a monetary phenomenon. The BoE is in charge of monetary policy in the UK (and some other things, such as acting as banker to the government, overseer of the payments system and so on). But, for this edition of Exponential Investor, monetary policy is the thing that really matters.

The BoE had two years to put measures into place to prevent crippling inflation from eroding people’s wealth and leading the UK economy into a deep recession.

Two years.

And what did it do?

Absolutely nothing.

Anyone who thinks this situation could not have been predicted simply doesn’t look at the economy hard enough. Not only did we see this coming, but we also wrote about it consistently for two years, warning of inflation and a recession off the back of it.

I know this because I was looking through my archives and came across a treasure chest of editorial, forecasting this exact situation.

From March 2020

This is what I wrote to my subscribers on 25 March 2020. This was during the depths of a market crash thanks to draconian lockdowns from the global pandemic (I’ve added some emphasis to highlight what we saw).

‘QE Infinity’. Get used to that term.

It means the US Federal Reserve has said there is no limit to the amount of money it can inject into the financial system. It has an “unlimited” amount of cash.

Let’s quickly clear that up. No, it doesn’t have unlimited amounts of cash. What it has is printing presses (figuratively speaking). And it can create new US dollars out of thin air.

Yep, from whence there was nought, there is now trillions more USD.

And they say bitcoin is created out of thin air…

The whole concept around “quantitative easing” is a little tricky to understand. But it’s something you’ll hear often, have heard about often. And we want to make sure you understand it so you understand the ramifications it has.

See, typically a central bank will use movements in interest rates to try and manage inflation and growth. In recent years we’ve seen interest rates hover at abnormally low levels. Giving central banks, like the Fed, little room to move rates lower to spur life into the economy should it begin to flounder.

QE allows a central bank to stimulate an economy in a different way. Rather than trying to lower rates to make borrowing more attractive hence spur investment back into the economy, the bank simply buys assets typically in the form of government bonds but can also come in the way of equity purchases. The aim is to increase money supply into the economy as the spark for investment and economic activity.

And in order to do this QE the central bank is able to “print” money out of thin air.

While unconventional and frankly a future inflationary disaster in the making, it’s not a new idea. The US Fed for example has been dabbling with this wacky methodology ever since December 2008. However, previous cycles of QE were capped. They stuck to limits. They knew that long term, rampant, endless money printing would lead to inflation when you pump excessive money into an economy.

Well, the rule book is now completely out the window.

As of Wednesday (Tuesday in the US), the world’s most powerful and influential central bank has free rein.

It can print as much money as it sees fit. This is the year of “QE Infinity”. It will just keep printing money buying bonds – and after the action on the markets last night, we suggest it’s already started to purchase equities to prop up the market.

Make no mistake, the actions of the Fed, the European Central Bank, the Bank of England, the Reserve Bank of Australia, all the central banks around the world in full “print mode” are going to set in some pretty worrying times in the months to come.

We’re expecting a bout of hard inflation as this plays out. Potentially if the US continues on its reckless way, hyperinflation. And then in order to try and control that, it’ll have no other means but to lift rates rampantly, adding further grime to the economic gears.

Suffice to say, while we might start to come out the other side of the coronavirus, the economic virus that’s being spread right now may change the game even more.

What we also have to now contend with is a surge in unemployment as the world’s economic output has ground to a halt. We could be fast looking at double-digit unemployment rates, not just in Australia, but around the world.

And even if the lockdowns are lifted and businesses begin to rehire, or place workers again, expect the levels of underemployment to lift. This all means there’s really only one outcome for the near future.

Recession is coming.

It was very clear that, just from the actions of the central banks during 2020 and 2021, inflation would become a problem. Furthermore, it was obvious that recession was imminent, too.

It was also clear that certain pockets of the market at were worth taking.

What to consider in a tanking market?

It stands to reason that, with all this doom and gloom in the market, this might be a worrying time for investors. And watching your portfolio go slowly lower isn’t fun, that’s for sure.

But there are ways to invest in the market that can provide something of a buffer to worsening economic conditions.

During our coverage of the markets over the last two years amid warnings of inflation and recessions, we’ve looked at certain industries that can help weather the storm.

We even put together a list of seven stocks for 50 years back in October 2020, which we might check in on later this week in Exponential Investor.

One of those we have looked at a couple times before is the large beverage company, Diageo (LSE:DGE).

This week, I looked at how the booze giant has fared over the last couple of years and pondered  what might happen to it if economic conditions continue to deteriorate.

Well, as the pandemic hit and we began warning of inflation, Diageo was trading down around GBp2,500. At the end of 2021, it was up over GBp4,000, and even today it’s still around GBp3,600.

That’s a pretty consistent performer in a market that’s widely pretty terrible.

It got me thinking about some others dotted around the world within the beverage industry.

The Coca-Cola Company (NYSE:KO) sprung to mind immediately. Coca-Cola was around $44 at the early stages of our warnings about inflation and impending recessions.

By the end of 2021, it was up around $60. And today? Around $60.

Hmmm… this is getting interesting.

Suntory Beverage & Food (TSE:2587) was another that immediately came to mind. Suntory was trading at around JPY4,000 in March 2020. It actually headed lower as the pandemic rolled on, but it’s now over JPY5,000 and trending towards its all-time highs.

Sure, food prices might be on the rise. Inflation is, from what we can see, already in double digits. And the economy is on shaky ground. Furthermore, the BoE is useless, ineffective and unfit for purpose. So, if anything is about to happen to the economy, it’ll get worse before it gets better.

However, if you’re thinking about the kinds of stocks that are worth considering to bolster a portfolio if things do get worse, these three are good examples of ones to watch.

Until next time…

Sam Volkering
Editor, Exponential Investor