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    Inflation, Minsky Moments and Active Fixed Income Investing

    Inflation is back, at least in the US.  Last month saw prices jump 5.4% over the past year.  For those of us that can remember back to the 80s, 5.4% doesn’t seem that high.  It is, however, the largest increase in 13 years and it could portend even higher price jumps down the track, although the market doesn’t seem to be pricing that in.

    Instead, according to the Fed, as things open up and supply chains return to normal, bottlenecks will begin to ease and inflationary pressures will subside.  Long term inflationary expectations remain subdued, with rates indicating the market is buying the story.

    Here in Australia, the RBA has consistently said that only strong wage growth can stoke local inflation.  While our hermit kingdom border policies will probably begin to ease next year, bringing back students, immigrants and even some Australians, the short-medium term outlook with a ringfenced labour market still shows no signs of a wage breakout.

    While the markets are brave in the face of the inflationary threat, when it comes to the availability of liquidity – i.e.; central bank printing presses – then markets are somewhat less bold.  Any sense of taper in monetary or fiscal accommodation leads to tantrums.  We don’t like market tantrums, so governments and central banks just keep rolling out the liquidity.  The recent calmness in the credit and bond markets means they are content – despite the economic upheaval still sweeping the world because of Cov-19.

    It’s difficult to know exactly how it all ends… sorry… where this all leads.  Endless liquidity may lead to persistent inflation, one day.  The only way to stomp on inflation is to taper the markets and raise rates, which makes markets grumpy.  So central banks and governments keep the money taps on.  Are we headed for a “Minsky moment”?

    Recent history has shown that when it comes to fixed income investing, being actively managed is a demonstrable advantage.  While the Ausbond composite fixed income benchmark is down -1.7% YTD, eInvest’s actively managed core income ETF – ECOR – is up 1.1% and our income maximiser fund – EMAX – is up 2.7%.   Those index tracking ETFs may be cheap…  fee wise.  Performance wise, not so much.

    One day the virus will pass, emergency market liquidity will be tapered and a course will be set for “normal”.  Navigating to that point with your fixed income portfolio is something you probably want to leave to skilled, active portfolio managers.

    Disclaimer: Please note that these are the views of the author, Tamas Calderwood, Distributions Specialist , eInvest, and is not financial advice.

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