The hottest summer on record, trouble with Middle Eastern oil supplies and former Defence Minister Healey is now Chancellor of a Labour government. For those of us who insist that past performance is not the best guide to the future, the uncanny parallels of 50 years ago are starting to seem like the joke of capricious gods.
Oil, geopolitics and rising costs
Most things today are, of course, drastically different to how they were in 1976. In particular, it’s Iran, not OPEC, that is causing petrol consternation. As tit-for-tat exchanges scuppered June’s memorandum of understanding, hostilities have settled into a standoff over the blockade of sanctions and nuclear material. The oscillating price of crude oil is the most visible gauge of geopolitical sentiment, but hides the true cost of disruption.
Long hydrocarbons have to be cracked into shorter, more useful ones, such as diesel and jet fuel. With refining capacity dented not only in the Gulf but also in Russia, the lifeblood of the global economy has become considerably dearer, as has fertiliser, which is similarly afflicted. It therefore seems likely that before too long, our weekly shops will come to grander totals, perhaps putting a dampener on more discretionary demand. What’s more, this year’s El Niño seems set to be one of the strongest on record. If the usual stormy autumn follows the warm ocean currents, coffee and cocoa will come at an even higher premium.
Markets rise despite uncertainty
Despite this litany of woes, stock markets are up handsomely so far this year. From April, US share prices recorded nine consecutive weeks of gains, partly because this followed a poor March and it seemed the conflict in Iran was soon to be resolved. But more importantly, six out of seven companies reported better earnings than the consensus expectation, and second-quarter results are on track to be just as impressive.
It seems as though we might be in the foothills of a much vaunted AI productivity revolution. Perhaps most encouragingly and reassuringly of all, the good news hasn’t been confined to Silicon Valley, energy companies or the defence sector. There has been real breadth to the stock market rally.
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Employment clouds the outlook
One fly in the ointment, however, is employment on both sides of the Atlantic. Data paints a bleak picture, but perhaps for very different reasons. Since former Chancellor Rachel Reeves’s first Budget in late October 2024, employment has fallen and we are unlikely to see a change of tack under the new Prime Minister that will reverse that trend.
By contrast, the employment picture on the other side of the Atlantic may be far from hale, but there are reasons to think that might at least be in part due to automation and other efficiencies, which, while painful in the short term, may augur well for the longer term. Nevertheless, the consensus seems to be that, despite those inflationary pressures coming down the pipeline, new Federal Reserve Chair, Kevin Warsh, will unlikely urge his colleagues to raise interest rates any time soon, lest they end up doing more economic harm than good.
Currency pressures and policy choices
It is difficult to discern what the Fed will do. The same can’t be said for US Treasury Secretary Scott Bessent, who, whether inadvertently or with cunning aforethought, left on display a remarkable single-item to-do list – buy five to ten billion worth of Yen to prop up the currency that has been slowly sliding to lows that might have caused discomfort in both Washington and Tokyo. Had American assets ultimately been sold by the Japanese to do the shoring up job themselves, that might have led to all sorts of knock-on effects, from higher borrowing costs for the White House to wider currency instability throughout Asia.
AI and the economics of abundance
In an interview with The Economist, Elon Musk speculated that the hyperbolic pace of advances in AI and robotics would drive massive deflation, not inflation, as the wider trend. It is true that, over time, things tend to become cheaper and more abundant due to technological progress. This is precisely what has happened in the long run. Accounting for wage increases over the past few decades, across almost every commodity you can think of, from uranium to sugar, coffee to rice, and platinum, natural gas and tobacco have all become more abundant through productivity gains, as have cars, furniture, clothing, smartphones, toys and televisions.
Productivity gains beyond the inflation basket
Much of what AI is making abundant right now is white-collar services and entry-level jobs in industries such as law, finance and software development, where data processing can easily be delegated to digital agents. But while this is fantastic news for people wanting to launch a startup requiring these sorts of services, not many of the things AI is automating to the ‘nth’ degree are in the official basket of goods our inflation measures are based on, or at least not directly.
The human touch
By 2036, it is plausible that many tasks will be nested within the programmatic loops of unthinking machines, their monetary value deflated to the price of air. But two things will likely remain worth paying for. First, goods and services that, through regulation or other means, have shielded themselves from the commodifying forces of technological progress. And second, what is and always will be impossible to automate because it is creative, unpredictable and unprogrammable – that which makes us human.
About William Morris
William is Head of Investments at Weatherbys Private Bank. He has over a decade of experience encompassing investment advice, portfolio optimisation and risk modelling, and enjoys bringing this world to life in a friendly and engaging way.
What you need to know
Investments can go up and down in value and you may not get back the full amount originally invested. Past performance is not a guide to future performance.