Opinion

Major investors like Warren Buffett and Goldman Sachs are increasing their positions in oil stocks. Buffett recently bought large positions in Chevron and Occidental Petroleum. For Goldman, Exxon is the favourite. The price of oil this year peaked at $123.70 a barrel on 8 March and has since fallen to around $100 a barrel. Historically, these are not low prices, but apparently there is more in the barrel.

The latest edition of the Bank of America Global Fund Manager Survey shows that fund managers are still overweight equities while their expectations of future economic growth have fallen sharply.

In fact, the chart below shows that fund managers have never been so pessimistic about growth. Not during Covid and not during the Financial Crisis. The mismatch between expectations and positioning is extreme.

Bond yields have shot up worldwide. The US 10-year yield stands at 2.90 percent compared to 1.50 percent at the beginning of the year. This has led not only to one of the biggest falls in bond prices ever, but also to a less attractive valuation of equities.

For the moment, inflation is largely caused by a sharp increase in energy prices. Two years ago, the oil price was negative for a while, but since then it has been rising rapidly. Sustainability policy measures have contributed to this, because investment in new oil extraction has been under pressure in recent years not only because of the low oil price.

If there is one economic lesson my father, a construction engineer, taught me, it’s that mortgage rates in Europe always follow what’s happening in the United States. When rates go up across the Atlantic, they’re bound to do the same in our part of the world. So when it comes to locking in a good mortgage rate, look west.

Not surprisingly, Berkshire Hathaway has risen 16 percent this year and has outperformed the S&P 500 by 23 percent over the past 12 months. Pricing power is an important criteria for Mr Buffett and Mr Munger in their selection process. Their company in essence is one large investment portfolio, and one that is resilient to increasing inflation.

Most research papers on inflation focus on the period from 1950, after World War II, or from the 1980s after former Fed Chairman Paul Volcker destroyed inflation with a mighty series of interest rate hikes. 

After the stock market crash of 1987, measures were taken to prevent a new financial drama in the future. Under Ronald Reagan, “The President’s Working Group on Financial Markets”, now better known as the Plunge Protection Team, was formed in 1988.

US mortgage rates have shot up since the start of this year. The 30-year fixed rate stands at 4.5 percent, the highest level since the start of 2019. Will this bring an end to the housing boom?

The biggest risk for investors at the moment is high inflation. While the market places too much emphasis on short-term inflation, it also tends to underestimate long-term inflation.

The news that Powell might raise interest rates by 50 basis points next time was greeted with cheers, as it would bring inflation under control more quickly. However, the Fed will be able to live with inflation hovering between 3 and 4 per cent for a long time, although Powell will never admit that. In the eurozone, it is certainly not about fighting higher inflation.