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Not so smooth of a ride

My eldest received his learners license not too long ago – watch out Canada! The experience of him writing the exam multiple times and then with him suddenly sitting in the driver’s seat ready to drive us home was unnerving, to say the least. It took me back to when I was not much older than he is now, in South Africa you can only receive your learners license at 17 and your license at 18, sitting behind the steering wheel of my parents old Volkswagen station wagon. Like most vehicles in South Africa it was a manual/standard drive.

If you have ever driven a standard drive vehicle you probably know how it goes in the beginning. My mother took me to the abandoned municipal airstrip not far outside of our little town. Based on my first attempt, I sure was glad not to have an audience and that I was not putting anyone or things at risk.

On my first attempt, I revved the car high, very high, and dropped the clutch. With screeching tires and my mom screaming at the top of her lungs, we raced forward. We picked up so much speed – well as much as an old wagon can do –  I got scared and slammed on the breaks. A different screech this time as we came to a stop. The car stalled, of course, as I did not have the clutch back in. Well, lesson learned: do not over-rev and drop the clutch – my mother, like any good parent, reinforced the lesson with a red face.

On the next try I did not give it enough gas and still dropped the clutch too fast. It felt like the wagon turned into a bucking bronco determined to buck us off.  I went forward-back, forward-back in my seat, my mind not quite sure what was going on. Deprived of gas and the gearbox demanding more power the wagon stalled again. More gas! Slower clutch release! I was told in beautiful expressive Afrikaans. You can probably guess what happened. Now I was revving the engine high again and very very slowly letting off the clutch, too slowly it turns out. The smell of a burning clutch filled the cabin. I pushed the clutch back in and let off the gas. This time I did not stall it  – a small win – but I also was not driving down the road waving at my friends yet.
I have been thinking back on this quite a lot these past number of months. I think it is fair to say that what we are experiencing in the markets, or the economy more broadly,  have a lot of the same characteristics.

We are coming out of a time where governments around the world spent more than ever to bolster the Covid ridden, locked down, economies. Interest rates were slashed to basically zero, quantitative easing (the introduction of new money into the money supply by a central bank) was accelerated and, unlike in the 2008/2009 bail out package, money was sent directly to businesses and consumers. This is akin to me revving the car and dropping the clutch like in my first attempt.  The economy and markets responded as our old wagon did – tires screeching it raced forward picking up speed as it went. The end result – higher inflation than what we have seen in decades (let’s ignore supply chain impacts for now). Now it is the central bankers who are getting scared and are slamming on the brakes by increasing interest rates and also easing their quantitative easing at the same time. Their hope? To slow down demand to stop the current rate of price increases.

What does it mean for the economy? Well, it will probably look and feel like that bucking bronco of a wagon, jerking forward as the effects of the reduced gas into the system starts slowing down the economy, maybe faster than anticipated, and the central banks continuing to adjust their policies as they receive updated data. The central banks have their sights set on inflation firstly, and secondly on the economy. At some point, that relationship will switch again and the economy will become the primary focus. In the meantime everything will be done to bring inflation under control.

I started my career in finance in a 7% inflation environment back in South Africa. I never thought I would see it again in my career, especially not in North America. In fact, deflation has been the biggest concern over the past two decades in North America and Europe.  What I have learned from high inflation is that (1) it has to be controlled to avoid runaway inflation, (2) it is fickle and can slow down rapidly once interest rates take hold and (3) central banks often overshoot. This means they often have to roll back some of the measures, like interest rates, they took to combat it.

While I am not sure how long the volatility will continue, yes this year has been worse than what we we have seen in a while, I remain confident that just as I did learn to drive a standard vehicle in the end – and came to love driving to this day – so too will the economy and markets move forward at some point and you will be the benefactor of that.

With patience, adaptability, and a steadfast investment strategy, we can confidently steer ourselves toward a future of financial stability and success. Remember, the best investment strategy is one that you can stick with through any market cycle – I know, that is sometimes easier said than done. Keep your hands on the wheel, your eyes on the road ahead, and trust the journey. Happy driving, and happy investing!

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