Submitted by Taps Coogan on the 5th of December 2019 to The Sounding Line.

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Martin Crabb of Shaw and Partners recently spoke with CNBC about what he sees as the biggest risk for global markets. Far from investors’ current obsession with the ‘trade war,’ Mr. Crabb sees the prospect for inflation as the real risk that the market is neither prepared for nor anticipating.

 

Some excerpts from Martin Crabb:

“Look a lot of people are opining on their 2020 strategy outlooks… everybody seems to be mildly optimistic about next year… The vernacular there is… President Trump wants to be re-elected. He wants a strong economy. he wants a strong share market. He’s probably going to put the China trade conflict to rest and allow the business and consumer sentiment to rise in the US.”

“The biggest risk is the one no one focuses on. So in my view, …it’s inflation. Every market participant, including every central bank, is fighting this total lack of inflation and if it ever comes back, we’re just totally not prepared for it. So, it’s not something that I see happening, but if it ever does happen, or if the market even thinks it’s going to happen, we could see a sharp reversal in bond markets and that could cause issues for the equity market as well. There is a heck of a lot of stimulus out there. Japan just announced more measures, Hong Kong (announced) more measures. There is lots of stimulus out there. If inflation catches any sort of bid into 2020, then that’s going to be a fox in the hen house… for markets. …I don’t see a high probability of it happening, but I see a lot of damage if it does.”

“Historically (rising oil prices) is what causes inflation. If you go back to the 1970s and the OPEC oil crisis, the price of oil went from $2 to $20… Obviously most economists take food and energy prices out of the CPI to remove the volatility, so we kind of see right through energy. But… we’ve seen copper improving. Iron ore is much better. So, industrial metals generally are getting more expensive… in some markets wages are starting to go up. So, there are sort of the preconditions for an increase in inflation but certainly no one predicts the genie to get out of the bottle, but that’s why I see it as a risk, because no one expects it to happen.”

As we discussed recently, one can add rising global food prices to the list of things signalling that a structural inflation problem may be taking seed. Of course, waiting for a rise in inflation has been a losing bet for many years, and while that may continue to remain the case, whenever inflation does return, the bond market is going to look like one of the biggest bubbles in human history.

There is a bit more to the interview, so enjoy the video above.

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