Season’s Greetings From Longbon & Company

2022 is one of those (few) years that, were my grandmother still alive, she would have used a very, very large broom to sweep it away, on the strike of Big Ben.  The world has been ravaged.  Not only has it had to deal with the aftermath (indeed in China, the continuation) of Covid lockdowns but the invasion of Ukraine.  If this was not enough to cope with there has been a notable lack of charismatic leadership across the world and the sad death of Her Majesty.  Perhaps that the year should end with England’s all-too-familiar early exit from the World Cup just about sums it all up.

Economically, the year has been difficult.  Perhaps the biggest understatement of all time!  Energy shocks (I just about remember 1973 and the oil crisis) have a profound effect on our daily lives and lead to significant change.   It is this that we are witnessing at the moment.  It is not necessarily a bad thing.  

The last decade was, effectively, lost through the zero interest rate policy, which led to zero growth (apart from the rise of the machines), drove a monumental chasm between the have and have nots, leading to extreme politics, discontentment amongst the young, re-energised unions, failed governments etc.  The combination of zero interest rates and government largesse (tax cuts, furlough etc.) was always likely to be inflationary. 

I consider this a ‘reset moment’ – the gamers of the ‘World Video Game’ have pressed the reset button – they did not like where it was heading.   Would a machine have had the same intuition?  Anyway, those central bankers did this by increasing interest rates (the MOST important investment metric).  It is a cruel and brutal lever to pull.  It destroys wealth and jobs in the short term BUT kills inflation and rewards savings instead of borrowing, leading to better conditions in the medium to long term.

The equity market understands where we are in time.  It has recognised that the valuable companies are those that generate cash now, not those that say they will at some point in the future (and then, in many cases, fail to deliver); investors have also recognised that it is governments that have run out of cash and not listed companies.   This explains why the government bond market (apart from irrefutable mathematics) has witnessed such steep falls in 2022, yet equity markets have been, to a greater extent, sheltered from the storm.  Indeed the FTSE 100 index has been the best performing stock market in 2022 – posting a gain to date of 4.1% in 2022.  I heaven’t read this in the daily papers nor seen it reported by the BBC.

In simple terms, investors are predicting a soft landing in 2023.  A ceiling to interest-rate rises, a deflation of ludicrous valuations (this has already happened in the Crypto market), indeed a reversion to common-sense valuations.  It is long overdue.

Closer to home, we have navigated your portfolios to the best of our abilities throughout 2022.  We cannot be immune from reality but we took steps at the end of last year to insulate portfolios as far as possible.  We were all shocked by Russia, the extent that inflation surged and the voracity of central bankers in their interest rate policy.  However, we also recognise that it is the best pill and that it will mend the patient.

We wish you all every happiness over the festive period and into 2023.


Andrew & Felix
For, and on behalf of, Longbon & Company