The Age of Scarcity - What Investors Have to Prepare for

Enlarge image

Replenishment comes - later: increasing demand meets scarce supply - this leads to permanently high prices

Photo: Jan Woitas / dpa

The past decades have been characterized by a lack of demand, which has been accompanied by a low propensity to invest on the part of companies, falling trend growth, increasing inequality, lower inflation and therefore steadily falling interest rates.

The supply-oriented economic policy on which this dynamic is based, which was characterized by the liberalization of trade policy and the movement of capital, the deregulation of markets and privatization, has increasingly lost support in recent years.

Daniel Pfellers

has many years of experience in macroeconomic analysis and financial market strategy.

He is the founder of the independent research company Research Ahead.

Since the outbreak of the Covid-19 pandemic, more activist politics have dominated.

Significant spending programs have been implemented, loan guarantees have been given, interest rates have been cut, liquidity support for banks and companies has been launched, and major bond purchase programs have been launched.

Because state transfers to households increased, but consumption options were temporarily severely restricted, household savings increased significantly.

As the pandemic subsides, this potential demand is likely to be discharged in the coming years - with far-reaching consequences for the financial markets.

Boom in demand meets supply bottleneck

This development is also supported by a fundamentally changed dynamic on the labor market. In the wake of the pandemic - most pronounced in the USA - the number of jobs has fallen sustainably. Unlike in pre-Corona times, the demand for labor is now the supply. As a result, the bargaining power of the workers increases - and wage growth can rise as a result.

This effect intensifies the already high demand due to the pandemic.

This in turn encounters delivery bottlenecks also caused by the pandemic and exacerbates them.

In the past decades, many companies had relocated production steps abroad in order to reduce costs, trimmed their supply chains for maximum efficiency and at the same time reduced inventories.

As a result, however, the entire production processes became more prone to failure.

Prices and investments rise

The pandemic itself, but also the measures to combat it, led to temporary production shutdowns and port closings. Particularly in the case of goods for which the pandemic was accompanied by increased demand, a pronounced shortage quickly manifested itself: Who does not remember the empty toilet paper shelves in the supermarket? Due to global transport difficulties, these bottlenecks now affect a large number of products, from building materials to cars.

Against this background, the behavior of companies is likely to change fundamentally.

They can now raise their prices while having strong incentives to ramp up their investments.

Both investments and consumption should therefore lead to a very dynamic growth environment in the long term.

However, the macroeconomic fluctuations are also likely to increase because the supply bottlenecks lead to a "stop and go" of the dependent production processes.

Such an environment of high demand and supply bottlenecks consequently remains marked by scarcity and, in contrast to the pre-pandemic period of insufficient demand, is not disinflationary but inflationary.

Therefore, the price pressure should continue to increase across the board.

Although inflation rates are likely to fall in the next few quarters due to base effects, they are nowhere near the pre-pandemic levels.

Therefore, both stronger average real growth and higher inflation should contribute to more dynamic nominal growth in the next few years.

Upswing despite tighter monetary policy

As a result, the central banks can withdraw from their bond purchase programs and noticeably raise key interest rates. However, higher nominal interest rates should not be confused with a restrictive monetary policy. In particular, the US Federal Reserve and the European Central Bank (ECB) have become more tolerant of higher inflation rates in recent years. Even if they reduce their monetary policy support measures, they will ensure that favorable financing conditions are maintained, which are reflected in low real yields and high credit availability. This should ensure that the economic upswing is not stalled over a longer period of time.

In line with higher nominal growth, nominal bond yields should also tend to rise over the next few years.

The inflation expectations priced into the bonds have already risen sharply this year, but they offer further potential.

Real yields are near record lows in the US and the euro zone.

In the longer term, they should also contribute to higher nominal returns.

However, this process is likely to be slow and real returns should remain clearly negative for a few years.

Debt ratios could fall

This means that the phase of financial repression will continue for a long time. Investors should therefore avoid long maturities in the bond markets and continue to overweight inflation-linked assets such as inflation-linked bonds or commodities. Due to high nominal growth paired with negative real returns, the debt ratios of important state actors such as the countries of the euro zone should turn around in the coming years: They could tend to fall. This would support the government bonds in question.

A phase of severe fluctuations is emerging for equities and commodities, triggered by the changed monetary policy of the central banks on the one hand and increased macroeconomic volatility on the other. In the meantime, there could also be major setbacks here, but in the long term the development should be clearly positive. However, the price / earnings ratios should only decrease gradually because of the ongoing financial repression. At the same time, corporate profits could develop positively in the coming years thanks to the dynamic growth environment and the improved pricing power of many companies, which in turn would be accompanied by higher share prices in the long term.

From a strategic perspective, bigger setbacks continue to present themselves as buying opportunities.

And the demand for raw materials - especially industrial metals and energy - is likely to remain high.

Daniel Pf Händler has many years of experience in macroeconomic analysis and financial market strategy.

He is the founder of the independent research company Research Ahead and a member of the opinion makers of manager-magazin.de.

Nevertheless, this column does not necessarily reflect the opinion of the editorial team of manager magazin.