George Lagaria, Chief Economist of Forvis Mazars Financial Planning UK, identifies three key risks for stock and bond markets. First, the potential instability in the Fed after Jerome Powell's stay as "shadowy" president, limiting the power of new president Kevin Wars. Secondly, the risk of overinvestment in Artificial Intelligence, with cancellations and delays in data centers. Thirdly, a possible bond crisis focusing on France and the United Kingdom. Lagaria warns that Europe is more exposed to stagnation, while markets are now moving from expectations of permanent inflation and retail investors.
Analyticalally:
In an interview with Liberal, Forvis' Chief Economist Mazars Financial Planning UK explains why investors now see markets as defence against the erosion of purchasing power, analyzes the risks posed by instability in the Fed, possible overinvestment in Artificial Intelligence and pressure on bond markets, while warning that Europe is more exposed to the range of stagnation.
At a time when markets move to new highs, despite energy uncertainty, inflationary pressures and geopolitical turbulence, George Lagarias points out that «steering wheel» It is neither exclusively held by Fed's decisions nor by oil prices. On the contrary, expectations of more permanent inflation and increased participation of retail investors play a central role.
Interview with Christos Th. Panagopoulos
Who's holding the wheel of the markets today? Fed's decisions or oil prices?
Right now neither one nor the other. The «steering wheel» the markets have kept it a very strong wave in recent years, that of retail investors, and, to some extent, especially in the equity markets, expectations of inflation.
There are too many out there, even my own clients, who see investment as defence against what they now perceive as more permanent inflation. You know, the previous generation grew up with no inflation. So investment or something that pays more than inflation didn't seem necessary.
But when you have stable inflation, not at 1.5%, but at 3.5% or 4%, and the inflation you feel in your pocket and supermarket may be higher than the official, you realize that this leads more retail people to investment. The same applies, of course, to institutional investors. Cash is not a viable investment when you have inflation of 3% or 4%.
So number one is inflation and number two is the retail audience access to all these platforms, which, at least abroad, have created a strong investment culture.
Despite rising energy prices, resurgence of inflation, geopolitical uncertainty and concerns about CAPEX In Artificial Intelligence, do markets react with new high ones? How do you explain it?
It's exactly the same reason. When you fear inflation, you now see investment as a way out.
And the modern generation of investors has learned to buy the fall. This, in 90% of cases, works fine. Buying the fall will lead to a loss of money only in the event of a major crisis.
Now, put on a little asterisk. Buying the fall —And that explains too many things.— works fine in times when we are sure of what is called «Fed put», i.e. the commitment of the Federal Reserve to help markets when things are difficult.
But now we are, not only in a transitional period in the Fed, but also in a somewhat new regime. Given at least Wednesday, on Jerome Powell's eve at the Fed Board of Directors for an indefinite period of time, Powell can function as «shaded» President of the Fed. He will rally around him some of the oldest members and thus will not let Kevin Wars impose some of the changes he wants, including lower interest rates.
So, then, when the market —And that's very important.— try to test the new Fed president in one or two months, he will have less power than any of his predecessors had to prove, if he wants, and give his credentials to the markets, that «I'm here to help.».
We are therefore in this peculiar regime, which can make markets more dangerous in any retreat.
What, in your view, are the greatest risks to stock exchanges and bonds?
The number one danger, I think, is the potential instability in the Fed.
The second – and one who can turn the stock markets – is the risk from Artificial Intelligence.
We are seeing the latest failure of promises for large investments and investment decisions in the sector. AI – i.e. Capital E Expenditure (CAPEX). We see over half the data centers, which were to be done this year, either cancelled as projects or delayed. So, the number two risk is that all this overinvestment in Artificial Intelligence might ultimately not work.
The third danger is a confessional crisis, focusing on either America or France and the United Kingdom.
We don’t talk much about them, but France and the United Kingdom have been in the eye of the cyclone in terms of a bond market for several years. —at least two years— And things are getting worse.
In England we may even have a change of government, with unforeseen consequences for the debt market. Likewise in France. It's just there we're used to a state of instability and slight government, but eventually the bond markets can react.
So, in summary, I see these three: Fed, Artificial Intelligence and, above all, the United Kingdom and France as possible faults for global bond markets.
How visible is the risk of stagnation and how would central banks react to prevent it?
Firstly, to say that once there is stagnation, it is very difficult for central banks to do anything to prevent it.
It is a phenomenon that may be relatively temporary, but you cannot do much in terms of interest rates. You have to decide whether to «Hit» the development or whether or not «Hit» inflation. In Europe the range of stagnation is quite visible.
In America it is much less visible, because, firstly, there are far greater investments in technology and, secondly, there we see much stronger growth. That is, with growth at 2.3%, as they expect by the end of the year, it is very difficult to go growth to zero, so you can say that there is the element of stagnation.
America will have what we say «Inflationary boom», i.e. inflation growth. It will have inflation, but it will also have growth.
Europe will have all the inflation that will come from the Straits of Hormuz and our dependence on imported hydrocarbons, without having development. So, yes, there we may see stagnation in Europe. The same applies to the United Kingdom.
The issue of energy goods, namely oil, gas and LNG is no longer about their price but about their availability and adequacy. How injured will these supply chains come out of the war, and how long will it take to fully restore them?
The supply chains, given the American trade war, are always thrown out. So it's not just about how wounded they'll come out of the war, it's about how corrupted they'll come out of an extremely difficult, strange and very challenging regime. A worse geopolitical and geo-economic environment, which has been systematically deteriorating in recent months.
So to give you an answer, I don't think they'll come out unscathed. In the long run, I don't think they'll come out unscathed. They'll be changed. And what we hope is that companies have now built this resilience so that they can respond to more difficult conditions in supply chains.
How do you think things will turn out on the Fed? Will her policy change after the withdrawal, Powell? Will her degree of independence from the White House be reduced? What conclusions do you lead to by studying the minutes of the FOMC meetings?
Ξέρετε, υπάρχει μια απόσταση ανάμεσα στον μύθο που θέλει τη Fed να έχει τέλεια ανεξαρτησία και στην πραγματικότητα, η οποία λέει ότι η Fed είχε πάντα μια ανοιχτή πόρτα με το Υπουργείο Οικονομικών. Αν μη τι άλλο, τον τελευταίο ενάμιση χρόνο αυτή η πόρτα είναι λίγο πιο κλειστή από ό,τι ήταν συνήθως. Και ο Λευκός Οίκος προσπαθεί να την ξανανοίξει.
Για καλό λόγο είναι κλειστή, γιατί οι απαιτήσεις του Λευκού Οίκου δεν μπορούν να πραγματοποιηθούν από μια κεντρική τράπεζα χωρίς να διακυβευτεί το κύρος της.
Αν θεωρώ ότι αυτό θα αλλάξει με τον Κέβιν Γουόρς; Αυτό που νομίζω ότι θα γίνει είναι πως θα υπάρξει μεγαλύτερη συνεννόηση. Όσο παράξενο κι αν ακούγεται, νομίζω ότι, τελικά, μόλις ξεπεράσουμε την περίοδο της αβεβαιότητας —η οποία συνδέεται με την αποχώρηση κάθε προέδρου της Fed, ας μη γελιόμαστε— μια ανοιχτή πόρτα ανάμεσα στο Υπουργείο Οικονομικών και τη Fed θα είναι χρήσιμη.
Διατηρώ, βεβαίως, ως προς αυτό που λέω, έναν βαθμό αβεβαιότητας, δεδομένου ότι αν ο Κέβιν Γουόρς δεν καταφέρει να πείσει το υπόλοιπο Συμβούλιο της Fed να μειώσει γρήγορα τα επιτόκια, μπορεί, όσο παράξενο κι αν φαίνεται, να βρεθεί άμεσα στο στόχαστρο του Προέδρου των ΗΠΑ.
Θεωρώ, λοιπόν, ότι η Fed θα χάσει την ανεξαρτησία της; Δύσκολα. Ακριβώς επειδή είναι τόσο θεσμοθετημένη η ανεξαρτησία της, ακόμη κι ένας άνθρωπος τοποθετημένος από τον Ντόναλντ Τραμπ μπορεί πολύ απλά να αυτονομηθεί και να προσπαθήσει να επιβάλει τη δική του πολιτική.
Υπάρχει και ένα δεύτερο ανάχωμα, που είναι η ίδια η δομή της Fed, με 12 ανεξάρτητα μέλη να ψηφίζουν κάθε φορά, ενώ η ψήφος του προέδρου είναι απλώς μία ψήφος.
Ο πρόεδρος έχει μόνο το δικαίωμα να θέτει την ατζέντα, να έχει μία ψήφο και να μιλάει στα media με κάπως μεγαλύτερο βάρος από όλους τους υπόλοιπους. Οπότε δεν βλέπω πώς ο Κέβιν Γουόρς θα καταφέρει εκ των έσω —γιατί αυτό είναι που φοβούνται όλοι— να ρίξει το «κάστρο» της Fed.
* O Γιώργος Λαγαρίας είναι Chief Economist της Forvis Mazars Financial Planning UK.
