Next month, the Bank of England’s Monetary Policy Committee is expected to raise the Bank Rate again, perhaps to the dizzying high of 0.5%. Students of these things will be interested to see how many members vote against this decision, still in denial that inflation is serious and could have anything to do with interest rates. The rest of us will continue to marvel at how cloth the MPC has been.
His previous comments on the topic of rising prices now sound ridiculously naïve, when he suggested that an inflationary surge would spread rapidly through the economy, much as if Covid were a wave we could be “looking through” towards a peaceful and disease-free future. . The difference is that we had a Covid antidote that was widely applied. The antidote to inflation is more expensive money, but the MPC has stubbornly refused to administer it.
The pain is now becoming apparent. The Bank’s inflation forecasts are outdated, and forecasts of 7% (rather higher according to the old retail price index) are becoming more common. The inevitable rise in domestic gas prices in April – even if the UK government wakes up in time to mitigate it – and rising fuel costs due to a creeping oil price make these predictions credible.
The ripple effects here will be severe, as the hikes will coincide with the 2.5% jump in National Insurance (i.e. the second income tax) contributions. Direct taxes have no impact on the inflation index, but raise the temperature of wage increases, which quickly affect prices. Employees in a hurry will demand salary increases or turn to the long list of vacancies.
The MPC seems to believe that inflation will magically fall back into its target range simply by raising the Bank Rate from negligible to very low. But no one who lived through the last episode of severe inflation 30 years ago would underestimate the task of rolling it back. A long, financially hot summer is in prospect.
I Fink, therefore I am
Larry Fink is not joking. At least, not those that are easily accessible to his readers. Perhaps his entire latest annual letter to CEOs is meant to be humorous, though the plodding prose suggests he’d better stick to fund management, where he’s been shockingly successful. Blackrock, the company he runs, has $10 trillion in corporate custody.
This barely imaginable sum, $10,000,000,000,000, is equivalent to about 7% of the market value of all listed companies on the planet, which means that when he writes a letter to the CEOs of the world, they read it. . The rest of us are just trying to analyze it for a deeper meaning. Here’s a riddle: “Accommodating the divergent interests of a company’s many divergent stakeholders is not easy. As CEO, I know this firsthand. In this polarized world, CEOs will invariably have one set of stakeholders demanding that we do one thing, while another set of stakeholders will demand that we do the exact opposite.
Well, up to a point, Larry. The giveaway here is that weasel word “stakeholders”, an infinitely elastic term that starts with shareholders, moves to employees, customers and suppliers, then on to governments, activists, extremists and those who want the company ceases to do business. Mr Fink is keen not to paint Blackrock too woke, perhaps, a comment Bloomberg’s Matt Levine interprets as “we’d still like to handle the money for the Republicans too”.
With its 7% stake in each company, Blackrock wields obvious influence, and Fink thinks allowing owners of that capital to vote on company resolutions could be a good thing. There is no immediate danger, of course, and that would be a strange form of shareholder democracy. For starters, much of the $10 trillion under management is not managed at all in the conventional sense, but is passively allocated by trackers in proportions that reflect the market value of the underlying stocks.
In a sense, Mr. Fink has no interest in whether these stocks are doing well or badly. If they are successful, Blackrock buys more to reflect the greater index weighting. If they hurt, it sells. As long as the fund matches the performance of the chosen index (minus Blackrock’s fees, of course), the only thing that matters is investors’ enthusiasm to buy more Blackrock funds.
So who are these investors? It’s a lot of individuals, but the bulk of the money comes from banks, pension and insurance funds, which decided stock picking was too difficult and invested their clients’ money in trackers (paid, of course). It’s cheaper for clients than paying higher fees for some fund managers who claim to beat passive fund performance through active stock selection, but frequently fail.
Which brings us back to the officially unwoke Blackrock. Mr. Fink’s alternative vision is for what he calls capitalism. “In today’s interconnected world, a company must create value for all of its stakeholders and be valued by them in order to deliver long-term value to its shareholders.” Ah yes, long-term value. Like motherhood, we can all agree that it’s a very good thing, but as a cynic once observed, the long term is just a succession of short terms, and as he might have added , today’s CEO has little interest in anything beyond short-term stock price performance.
So as our beleaguered CEO reads his letter and wonders what is expected of him, he can take comfort in his wonderfully generous contract, look ahead (but not very far), and be grateful for not leading an oil company.
Jonathan Ford and I host a podcast, published every Friday morning, called A Long Time in Finance, available on Spotify and Apple. 20 minutes is also not long in finance.