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The King Canute theory of inflation

Updated: Dec 3, 2021

now that the tide is inward- where do we stand (or sit)?

Asset manager “herd” –overweight OR underweight.


  • In September 2021 US CPI shot up to 6.2%. The S&P 500 fell 4.76%.

  • Oct/November news bites blamed the surge on Central Banks blindly assuming their Policy decisions would keep inflation in check.

  • Asset Managers seem well-aware of the dangers. But- they can NOT opt-out of making investment decisions.

  • Phil Smeaton (VAM/Sanlam) – sees the issue as a trade-off: “Do central banks have the mandate to fight inflation at the cost of growth?”

  • Daniel Jolliffe (Quilters Cheviot)- navigating the problem: “ The specific commodity ETF that we own, is up +27.76% from the end of March 2021 to the present day.”

  • Lorenzo La Posta (Momentum)-Our central view is that inflation might be sustained for a certain period of time but should ultimately come back to long term “normal” values. We shall be worried if US CPI growth remains at +6.2% instead! “.

  • Our article concludes with an explanation for inexperienced investors on the effects of inflation.

The King Canute Theory of Inflation- now that the tide is inward- where do we stand (or sit)?

According to Mervyn King, the former governor of the Bank of England, it seems Central Banks around the world have been caught out by inflation which has risen despite their strong belief that it would not. Hence his accusation of likening policy to King Canute, who many mythical years ago, demanded that the incoming tide should stop. It did not. According to Mr. King the tide “dashed over his feet driven by the laws of nature” ( The Guardian- 23rd Nov).

King, (Mervyn not Canute), is joined in criticism by legendry hedge fund manager Paul Tudor. Tudor won his spurs predicting the 1987 stock market crash an achievement which delivers an audience. Tudor is more specific in blaming the Fed Chairman, Jerome Powell, accusing the Fed of being “inflation creators not inflation fighters”. Credit Suisse have also increased their odds of the Federal Reserve committing a Policy mistake from 25% in early October to 40% in later October which adds tension.

All of this matters, according to Tudor, because “The No 1 issue facing Main Street investors is inflation, and it its pretty clear to me that inflation is not transitory, it’s probably the biggest single threat to, certainly financial markets and again probably I think to society just in general”.

Tension is being felt by experienced investors for sure. The attached slide “Market Sentiment” is provided by Momentum’s Andrew Hardy, showing that higher-than-expected inflation and a central bank policy error (currently nearly the same thing) is causing investors the biggest concern. Hardy’s colleague, Lorenzo La Posta adds “ Inflation dynamics will have impact on central banks’ actions, interest rates changes, consumer spending and equity valuations. As such, it is today the single most important variable out there.”

Interestingly, longer term structural consequences of COVID and the uneven global vaccine program are way down the worry list. For Mondial clients, we should be aware of this threat because in September when the unexpectedly high US inflation figures of 6% plus hit in September, the buoyant S&P 500 dropped 4.76%. Clearly a squeaky wheel within a TYD figure of +14.68% (as of September). September showed how easy it might be to spook markets.

Andrew’s second slide, “Measures of US Inflation and forward expectations” shows the blue US CPI (Consumer Price Index) hitting 6.2% in October. It is the suddenness of the rise which causes the most distress. According to the critics, the rise was an unintended consequence of Policy.


1. The Herd View- our expert asset manager view.

2. For inexperienced investors: the effects of inflation.

1. The Herd View- our expert asset manager view.

For Daniel Jolliffe, at Quilter Cheviot,I don’t think we can call it a threat anymore”., continuing , “The impact of lockdown’s ending, people returning to work and reverting to their pre-COVID spending habits was always going to create inflationary pressure. However, during the early part of 2021, most economic commentary that focused on inflation, specified that it was going to be transitory, which hasn’t been the case. The reason for this is due to the significant supply chain issues that have occurred globally, whether it be diminishing sources of natural gas or the lack of Semi-conductors being produced. Therefore, higher inflation has lingered more than most people thought.”

For Joliffe, the matter of making portfolio decisions to navigate the inflation specter has been occupying the QC team for some time: “ we began to look at ways that Investment Managers could enhance the capital preservation characteristics of the portfolios that we manage. Therefore, I opted to invest in a Commodities-focused ETF, that contains exposures to Oil, Natural Gas, Industrial metals and food crops, to ensure that our clients benefit financially from rising inflation. The specific commodity ETF that we own, is up +27.76% from the end of March 2021 to the present day.”

Phil Smeaton at VAM/Sanlam, echoes Joliffe in that whilst the Oct CPI might have been sudden, asset managers have been tangling with what to do for some time, “The concern is not necessarily about inflation itself but rather what is the Fed going to do fight inflation and whether it is even possible for inflation to be fought. Do central banks have the mandate to fight inflation at the cost of growth? The answer to that is at best unclear because if they fight inflation, it is likely to bring about a collapse in the stock market and a severe recession. So ultimately the concern is not whether you are losing 4-6% of your purchasing power, rather that they actually have to fight inflation, and the consequences of doing so. So if inflation keeps rising, the question becomes at what point do we decide to have a recession. Our view is that there is more risk around now than there has been for a long time and investors should be less concerned about missing out on returns than they are about losing a significant amount of their nominal capital, without elements of their portfolios providing some degree of protection.”. That sounds a bit serious!

In summary, the news bytes are clearly sounding the inflation warning. Our asset managers heard them long ago. They look to build portfolios around the problem, navigate the problem. For them, the news bytes arrive after their research teams have identified the problem. They are not “newsagents” and must keep actively managing portfolios because money must remain invested honoring the need for medium to long term investors that “time in the market (whatever the problems) is better than timing the market”.

2. For inexperienced investors: the effects of inflation.

An excellent tool for measuring the effects of inflation is the Rule of 72. The actual accurate number is 71.8 but teachers often take the easier route which we will follow. The Rule of 72 is a simplified formula for calculating how quickly your purchasing power will half. Not too long ago US Inflation targets were in the order of 2% per annum. In September, the actual number hit 6.2%. Meaning:

  • 72 divided by 2 = purchasing power eroding in half over 36 years.

  • 72 divided by 6.2 =purchasing power eroding in half over 11.6 years.

The rise in inflation from 2-ish to 6-ish would therefore have a massive impact on society (per Tudors comments above) if it were sustained and not brought under control.

The Rule of 72 can also be used to measure how long it will take for an investment to double. In measuring performance growth, the formula can be used to measure the effect of compounded growth.



For more details, or to contact Sean Kelleher CEO, Mondial Dubai LLC, please contact us at

+971 56 2228 535

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