New Masters Of Inflation Revealed!!

The talk in the cold Forty Foot waters this morning was the Masters. And, not just the golf. The elephant in the Irish political room has revealed itself once more. Apparently, Secretaries General in the public service are our true Masters. That conclusion swiftly led to a ‘fantasy job’ group chat with my own idea for a new chair of Inflation Studies in Trinity College not just being shot down but described as “obsolete”. Ouch! Back at The Tower of Gravitas I trashed my Robert Watt intro e-mail quicker than a Liz Truss tank selfie and steadied myself for further investigation. Happily, the investigation did not need to be forensic, nor need to be passed on to Dame Dick and the Metropolitan Police, so the results can be revealed today rather than in the next decade. Let’s meet our new Masters of Inflation…..

Wajih Ahmed: Who???? Wajih might actually be described as a Wall Street “Master of The Universe” but he’s not your typical bond, stock or currency guru. Firstly, he’s only 24-years old. Second, thanks to the super editorial content work by the team, we also know that he graduated from university aged just 17 and joined Goldman Sachs one year later. This guy doesn’t do stock trading, M&A, bond arbitrage or crypto. Nope, he sits on an inflation trading desk and apparently that team has made just the $300m of trading profits in the last 3 months (per Bloomberg). The trading room chat is that European inflation bets and derivatives have been the big winner trades. Interestingly, you’ll note gold doesn’t feature as a trading winner despite its historical super powers in inflationary environments. Time to meet another new Master….

Sam Bankman-Fried: In the world of crypto trading he might be better known as ‘SBF’ and he is the CEO and founder of FTX, a cryptocurrency trading exchange. Cryptocurrencies might also be the new reason why gold hasn’t really set the world on fire in 2022 despite spectacular inflation data around the world. There is no doubt crypto is siphoning off capital that would have previously moved into gold. Check out the latest Nasdaq survey which shows that 72% of financial advisors “would invest more in crypto” if there was an appropriate fund(ETF) available. This is music to SBF’s ears and also insanely profitable. The 30-year old American has a net worth approaching $25 billion and wants to give all his money away. I suspect he’s having more fun than the Goldman inflation trading desk too. SBF shares an apartment with ten of his mates in Bermuda, drives a Toyota Corolla and sleeps on a bean bag.

So, apart from driving a Japanese car, I’ve a bit of catch up to do on these guys. However, on a much more serious note I’m not sure crypto will hang on to its recent gains if some recent developments gather pace. Bluntly, crypto remains a ‘risk asset’ and has benefitted from improved sentiment in financial markets. Right now, I see three risks – all part of the inflation story but with very different outcomes, and one of which is hugely difficult to model but could be very destabilising globally. Let’s deal with the easier ones first….

Supply Chain Shock: The disruption of the Ukraine-Russia war is clearly having an impact but we should also be keeping an eye on two other developments:

  1. China: A zero Covid policy response has locked down 30 million people in Shanghai. This has resulted in typical 100 ship queues outside Chinese ports ballooning to a 500 ship armada.
  2. UK: Having flame-grilled Rishi Sunak’s prime ministerial hopes one can only wonder what the Great Misleader will do next. For starters, there are worrying reports of Article 16/Brexit trade truc(k)ulence coming and the embarassing scenes of lorry car parks in Kent are screaming for Downing Street distraction tactics. Sadly, those ”sunlit uplands” of Brexit fantasists not only “hold all the cards”, but also all the lorries.

Financial Shock: Bond markets have enjoyed a 40 year bull market but the re-emergence of inflation has incinerated portfolio values on a seismic scale. Bond markets last week dropped another $960 billion in value. That’s a staggering $6 trillion vaporisation of value from the bond market highs of summer 2020. This scale of loss is ‘unprecedented’ according to all the commentariat. My concern is the derivative products which have been manufactured based on bond market assumptions (vs unprecedented reality) and the possibility of a financial ‘accident’ at a significant financial institution. One might recall Warren Buffett twenty years ago describing derivatives as “financial weapons of mass destruction”.  So, let’s hope bond market collapse is not the trigger.

Geopolitical Shock: This is possibly the most explosive and also the most difficult to fix. Inflation for the poorest people on the planet becomes a life or death scenario. We have documented the Ukraine-Russia food chain impact previously but there are already very early signs of what hunger can do. The turmoil in recent days in Pakistan and Sri Lanka are not exclusively food related but it feels too coincidental for those with memories of the Arab Spring in 2010-2011. The tragic destruction of Libya, Syria and Yemen will take generations to rebuild, and I remain convinced Russia’s use of Syria as a test battle ground was a critical encouragement to Mad Vlad and his mass murder machine. A destabilised Pakistan and its 225 million people with nuclear weapons next door to a 1.3 billion person Indian neighbour with a worryingly nationalistic government and more nuclear weapons should keep us awake at night. In this instance, new Masters could be very bad news.

On a more positive inflation note, there is evidence of economic activity slowing down. Additional supply chain shocks will add to that dampening effect. In fact, global GDP data and freight rates are rolling over. However, the big fear is global hunger and the growing probability of an attritional war in Ukraine. Again, our European Masters might be missing the big picture on painful energy supply decisions compared to global hunger shock waves. Wonder is it time for me to draft a ‘Gas Master’ role …..for the attention of…. Sir Humphrey of Humanity?


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