The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.
The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.
Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is Robeco Switzerland AG, Josefstrasse 218, 8005 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.
Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/Robeco Switzerland product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/Robeco Switzerland offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.
This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.
Earlier this year the Financial Times called the remarkable lack of inflation in the US “A fly in the Fed’s ointment”. Despite the current expansion entering its ninth year, producer confidence hitting a 15-year high in September and unemployment dropping to one of its lowest levels in over 50 years, this has not stopped core inflation from falling to 1.3% in August.One might be tempted to look for temporary factors that led to this drop, but it is hard to escape the impression that this so-called ‘lowflation’ is anything more than just a temporary phenomenon, or one that is limited to the US. Given the inflation distribution in developed economies over the past 20 years, it is clear that the trend of ever-declining inflation rates has been going on for quite some time now.
There are many factors at play that explain this downward trend. Everything from de-unionization to greater efficiency (due to Big Data), from improved transparency (Amazon, the Internet) to globalization, and from digitization to aging populations, have all been mentioned as causes of this worldwide phenomenon. Added to this is the anchoring effect of the inflation expectations themselves: just as higher inflation expectations can lead to higher wage demands and, in turn, higher inflation, the same also applies to the downside.
It is this latter effect that explains the ECB’s current tenacity in its decision to continue pursuing an (overly) accommodative monetary policy: with inflation expected to be 2%, you can still push real interest rates to -2%, by cutting policy rates to 0%. That’s a lot harder to do if inflation is expected to drop to 0%. For this reason, economists like Paul Krugman and Olivier Blanchard are actually advocating raising inflation targets to 3% from the current 2% norm, in order to stay clear of the lowflation vortex.
This line of thinking is strongly opposed by another group of economists who believe that inflation will be structurally lower from now on, and that it is crucial that central banks adjust their policy accordingly. Ultra-loose monetary policy may not have led to regular inflation as defined by the CPI calculations, but it certainly did have some impact: it may have greatly destabilized asset price inflation. Over the past five years, many assets (housing, US equities, most bonds) have become expensive, which raises the odds of another boom-bust outcome. Central banks should therefore either pay less attention to traditional inflation, or even lower the inflation targets.
So where does this leave us? With two options. The first is that inflation is indeed a thing of the past, but as long as central banks refuse to recognize this, financial markets bubbles will be a permanent fixture. In this scenario, most assets may have become expensive already, but as long as central banks maintain the loose liquidity, there is no reason why they should not become even more expensive in 2018. This game will be a joyful one, right up until the next crash happens, that is.
The second option is that inflation is not dead. Declining commodity prices, disinflation linked to cheap labor in China, a drop in the natural unemployment rate: all of these factors have had an only temporary impact. In this scenario, wages are the main variable to keep an eye on, as they determine the fate of central banks and bonds, alike. Given the current benign inflation expectations, in this scenario, the bond markets appear to be the most vulnerable.
This article forms part of the Robeco 2018 outlook entitled Playing in Extra Time.