MRB’s latest report updates our investment strategy amidst the uncertainty of the war in the Middle East. As occurred during the tariff war last year, investors face frequent setbacks and U-turns. The combatants have diverging war aims and incentives for a ceasefire, and the U.S. administration has frequently reversed course while executing its policies.
Concern about the potential economic damage is at the top of the worry list for investors. There has also been a jump in short-term inflation expectations due to much higher energy prices (and the increase in prices of other goods that use the Strait of Hormuz). However, assuming the war peters out at some point before undermining the still-robust global economic expansion, the bigger risk is that longer-term inflation expectations finally revive after lying dormant in recent decades.
To this end, last week’s global PMI flashes for March confirmed that economic activity has held up so far this month. Ominously, the PMI input and output price indexes remain historically perky, even before energy prices soared this month. These series have been elevated for much of the current decade, confirming that inflation is more entrenched than in recent decades.
Global economic slack has progressively diminished this decade, implying that self-reinforcing price and wage increases will persist until an economic downturn kills labor’s bargaining power and companies’ ability to lift prices. The recent rise in bond yields is but a taste of what lies ahead.
