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Steen Jakobsen: Inflation unlike anything experienced in decades

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Saxo Markets Chief Investment Officer, Steen Jakobsen, has warned of the profound impacts inflation may have on the global economy in the years ahead.

The prominent investor sounded the alarm in an article titled “This time is different” in the Saxo Group Q4 2021 update, released a short time ago to Asia Markets.

“The size and nature of the pandemic policy response will show that this time, inflation outcomes really will be very different from anything we have experienced in decades,” Jakobsen writes.

Jakobsen references the 2011 book, This Time Is Different: Eight Centuries of Financial Folly, by Carmen Reinhart and Kenneth Rogoff.

The book suggests the policy response to the global financial crisis, which saw the massive build-up of additional and unsustainable debt, would lead to a new crisis in developed markets.

Jakobsen says while Reinhart and Rogoff may have had their thesis disproved in the decade following the GFC, COVID-19 presents a new paradigm.

“…The overall Reinhart and Rogoff point, that debt build-ups always lead to serious trouble will eventually prove correct. That’s because at such high debt levels, monetary policy no longer gets traction now that we are at the effective zero bound for rates.

“To avert an immediate crisis, the pandemic response brought fiscal stimulus on the scale of war mobilisation, supporting basic incomes and MMT-like direct transfers to nearly every sector of the economy.

“It was a massive demand stimulus at a time when the economy was shutting down the supply side to deal with the virus. And even as we open up from the pandemic, the new fiscal dominance will continue as we face three generational challenges simultaneously – inequality, infrastructure, and climate change policy (or the green transformation).

“The economic results of this new focus will be: ever-bigger government, more intrusive regulations, supply chain disruptions, inflation, no price discovery, a general hard swing to the left in the western world and―not least―the increased “channelling of capital” into small pockets of investable resources and assets.”

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Decarbonisation will underpin inflation

Jakobsen believes the current decarbonisation aspirations of politicians and environmentalist are too extreme.

“Decarbonisation is needed, absolutely, but the current palette of technologies doesn’t fit the bill… In short, our basic problem is that the physical world is too small for the aspi- ration and visions of our politicians and environmental movements. The more we decarbonise under the present model the more we metallise the economy.”

“The ESG and green transformation is simply the single largest policy bet ever undertaken, and the main consequences will be inflation and ever lower real rates. Inflation in this case will be a function of the physical world not able to deliver the supply relative to the quantity of money and demand, and negative real rates tell us the future is one of low real growth through low productivity growth.”

Similar concerns were recently raised by Billionaire industrialist Gautam Adani, who warned current global decarbonisation aspirations will put hundreds of millions of people in emerging economies on an “accelerated path to darkness”.

Steen Jakobsen’s best investment ideas

Jakobsen says this global economic backdrop can indeed be embraced by investors.

He identified two assets classes that he thinks provide the best long-term investment opportunities – Government-sanctioned assets, and assets with price discovery.

“This means green and, ironically, commodities have the best odds of producing long-term excess returns,” he says.

“This does not mean the projection from here will go from one success directly to the next. Au-contraire: the present model of negative real rates as a funding source for unproductive changes to society will lead to some sort of breakdown.

“This will however only lead to ever more funds and subsidies for the same failed transition. Eventually, we have to hope, new energy sources will come to the rescue (fusion energy?) with vastly superior outputs per invested unit of energy and per invested dollar. For now though, money talks.”

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