George Lagarias, Chief Economist and a Director of Mazars Wealth Management, will mull over these and other issues at an ICAEW online event next week that questions how long the different realities between the real and the financial economy can persist and their investment implications. 

“Investment and pension portfolios and the experience of going to the supermarket are two vastly different realities. Even as prices spike and supermarket shelves empty, stocks continue to climb. In the real economy, no state in a western capitalist society is going to significantly subsidise your lifestyle. But in the financial economy this tenet doesn’t necessarily hold true,” Lagarias argues. 

Lagarias believes subsidising investments using quantitative easing was a necessary strategy by central banks around the world who had no choice but to inject confidence in the markets “Central banks have no alternative other than to subsidise risk, but the more you subsidise it, the more people depend on it. And they’ve been depending on it for well over 12 years now. The question is how long can this last?” he asks. “In 2008, we didn’t think that quantitative easing could drive markets up in perpetuity but now we know it can do so for a long time.” 

However, the implications of that persistent dichotomy are mainly political, Lagarias warns. “If the holders of stocks and bonds are 10 to 20% of the population at best, there’s a feeling that those of privilege are being subsidised by the government and that anger can very easily spill over into elections and referenda.”

“People can live with this dichotomy for a long time however we need to be prepared that the longer it lasts, the more significant the political fallout,” Lagarias warns. 

For the first time in the last 12 years of the quantitative easing regime, we are faced with higher inflation, likely to last for a significant time due to the disarray of global supply chains following the pandemic. But Lagarias doesn’t believe that higher inflation will have a dampening impact on the markets. 

“Higher interest rates are not a panacea for every type of inflation. The point I’m making is that inflation will probably not undermine the strength of markets, especially equity markets. It can cause a problem for bonds – we are certainly looking at that,” Lagarias says.

Meanwhile, Lagarias speculates that plans by the US government to pass a $5 trillion economic stimulus bill to help the economy by encouraging spending among those on lower incomes could prompt other governments to follow suit. “If that happens, the question is whether we see the rise of real demand inflation, which means higher interest rates and eventual normalisation of the economy vis a vis financial markets. It also means that the UK has to follow and that’s good news for those who expect Chancellor Sunak to open his purse.”

George Lagarias, Chief Economist and a Director of Mazars Wealth Management will give his views on how the investment landscape looks set to pan out at an ICAEW online event on 12 October. Find out more and sign up here.