Coffee with an economist from one of our very big mainstream fund management companies this morning. The interesting thing about this was that she has become a deflationist.
She sees the risk of high inflation further out, once the global economy has improved and we see some demand coming back.
But right now, what with the new realisation that the banking crisis never went away, and the evidence of consumer stress, she can’t see inflation being much of a bother.
Once the cost-push factors of the last few years (the rise in the oil price, VAT and so on) drop out of the numbers, we will, she says, be back fretting about deflation again.
Will we? In a sense yes. Of course we live in deflationary times – credit is tight, real wage rises are non existent and consumers are stretched about as far as possible, so it is hard to see an easy way out of our mess.
But just because the underlying macro environment of our economy is nastily deflationary doesn’t mean we can’t keep seeing a high or rising consumer price index and retail price index. Why? Same reason as in 2008. Politics.
A new note from Bedlam Asset Management makes the point nicely. Most of the media has lost interest in Tunisia and in Egypt. And now that Libya, with its 1.7m barrels of much-in-demand light pure oil looks like it is sorting itself out, you could be forgiven for thinking that global politics were calming a little.
But the Arab Spring isn’t over yet. There could be a much more disruptive surprise on the horizon for markets: Algeria. Since 1945 this has, says Bedlam, had one of the “most woeful” histories of the Middle East and North Africa (MENA) nations. Independence came in 1962. Three presidents, varying only in “their degree of brutality”, followed.
Then in 1991 there was an election. The Islamic Salvation Front (FIS) won. The West weren’t that into that. The result was overturned and another army appointee took the top job. Since 1999, the president has been Abdelaziz Bouteflika. He won the last election with 90% of the vote, something that would have made even the old Stalinist politicians “blush with embarrassment.”
Now he controls the Executive, the military and the “highly corrupt” state oil company. And not in a very nice way (the likes of Amnesty International have long been banned). Civil unrest and suicide bombings have accelerated recently; relations with neighbours are “odious”; and under the circumstances, the chances of the regime hanging on as freedom explodes around it are “small and diminishing”.
This matters, largely because it just does, but also because Algeria exports 1.8m barrels of oil a day and is the sixth largest natural gas producer in the world. In Europe, it is third only to Russia and Norway. Hassi R’Mel, its pipeline crossroad, is the most important single gas hub in Europe. So if Algeria sees a messy regime change, oil, and in particular, gas prices will soar.
The consensus view is the one I heard this morning – that oil prices will soon fall thanks to low demand. But what if it isn’t demand that will be driving prices but supply? Energy markets, as Bedlam says, “look very vulnerable.”
Our view has long been that the next few years are about a deflationary macro environment overlaid with consumer price inflation (mainly driven by external events). Algeria is just one more reason to keep watching for just that danger.