Published by Kauders Portfolio Management, Authorised and regulated by the Financial Services Authority
So price inflation is down again. Is that good news? We think not. Governments love inflation, as an easy way to extract taxes. The problem is that they cannot make it happen.
Both Britain and America are sliding into recession. The American prognosis for whoever becomes President was stated clearly in Contrary View 13, More credit than cents - Gush versus Bore and the disputed result only reinforces that argument.
The aggregate economic statistics will be demonstrating recession within a few months. Equity markets are turning down, because there will be no easy answers through credit expansion. It doesn't matter much whether recession starts with mistakes by central bankers, changes in oil prices, or weariness by consumers. The present damning evidence in the motor trade, where new car prices are falling fast, will lead to a lower spend on advertising over the next few months with a knock-on effect on some media revenue.
Of course, businesses and politicians never plan for recession. The slide into recession always begins from the combination of minor downturns in a number of apparently unconnected business areas, during which analysts announce that there will be a soft landing. When it's pretty obvious that something is wrong we will be told that there is merely a technical recession. This will be followed by declarations that the recession is over and the recovery beginning, long before the recession has spent its force. This is the normal cycle of opinion. Don't expect anything else.
This recession will be rather different to the last one. There will be no easy escape through lower interest rates and credit expansion, because the inflation rate will simply fall faster than nominal interest rates, leading to higher real interest costs. Perversely, lower nominal rates will produce more problems, in terms of lost income, than they solve. All this is consistent with a Western rerun of the deflationary experience that Japan has gone through in the last ten years.
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