00:00Great to have you on the program again, Mark. So is what we're seeing on bond markets really about inflation
00:06or about geopolitics and energy security?
00:10Well, it's all three. It is definitely about inflation. It's not just oil price inflation.
00:17Probably the more important part of this is there is actually plenty of oil around, a lot of it in
00:24maritime storage, thanks to all the sanctions on Russia and Iran.
00:29But that's a little bit by the by. The real problem is actually in the product space with petrochemicals, a
00:38supply of helium, all sorts of supply of nitrogen, all critical for the production of plastics, petrochemicals, component parts of
00:49mobile phones, defense equipment.
00:52And, you know, a lot of that, the raw material which go into that or the semi finished process materials
00:59come out of the Persian Gulf.
01:01And the longer this goes on, the more the disruption is going to be and the more upward pressure on
01:07prices.
01:07You see it in memory prices now, which have gone up basically fourfold in a space of about eight, nine
01:15months.
01:16Borrowing costs are rising from the UK to Japan. Would you say that the bond markets are telling us that
01:22the era of cheap money is over?
01:25Well, the bond markets are basically telling us that given most developed economies are straining at the leash already in
01:37fiscal terms,
01:37by they've got a very, very high debt burden. There's not much actually central banks can do to control this
01:46sort of inflation because it's supply side and interest rates only deal with the demand side.
01:52So where the central banks are really challenged is to balance out how much of the supply side pressure on
02:00inflation is going to end up actually creating a lot of demand destruction,
02:05i.e. slowing economies, for which the higher interest rates or markedly higher interest rates, one should say, are probably
02:13not the best cure.
02:15So it's a very, very challenging environment for central banks.
02:19It's a challenging environment. And you're also talking about pressures on global economies.
02:24So in this climate, how are investors viewing other places, China, for example, compared to other major economies?
02:32Well, they're certainly viewing China as being in a better place because in inflation terms,
02:38it's obviously started from a sustained period of zero inflation in terms of consumer prices
02:46prices or negative inflation for a long period on producer prices.
02:51But when we look at the data that we have today, clearly China is starting to suffer the consequences of
02:58needing to rein in production
03:00because it knows that in the long run, supply chains may not be able to deliver the amount of raw
03:07materials
03:08and semi-processed materials that it needs to keep above all its export engine going.
03:16So who is under most pressure here, Mark? Is it governments? Is it businesses? Or is it households?
03:25It's governments in the sense that in comparison to the disruption that we had during COVID,
03:32they haven't got the fiscal headroom, i.e. the ability to cap prices, which, as IMS Georgieva said,
03:40you know, that doesn't actually help because in a lot of cases the spillover is that they buy in because
03:46they can
03:47and they cap prices for consumers and businesses, but then that spills over into the emerging and developing world
03:56with very negative consequences because they're effectively priced out
04:01and that creates a lot of inflation in those economies, which will also create a slowdown.
04:06And a lot of those are in Asia, and Asia is the engine of global economic growth.
04:12So, you know, Europe, you know, I would say is probably the most vulnerable at the current point in time,
04:19and the U.S. probably the least vulnerable because it has so much energy supplies,
04:25but it needs other raw materials. So there's no one in a particularly good place on this.
04:31Mark Otsfold from ATM Investors Services International. Thank you.
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