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Mark Mobius: Central banks are losing the game and US rates could hit 9% as a result

29 September 2022

The veteran fund manager expects interest rates in the US to reach 9% if inflation does not come down.

By Jonathan Jones,

Editor, Trustnet

Interest rates in the US could hit 9% as central banks remain behind the curve, according to veteran fund manager Mark Mobius, who has warned that the rise of cryptocurrency could also play a major factor in monetary policy.

Last week, the Federal Reserve upped rates by 0.75 percentage points to the 3-3.25% range and the Fed’s dot plot, which projects future rate rises, shows rates at 4.4% by year-end 2022 and 4.6% in 2023, suggesting there is another 120 basis points to increase.

At the time, some analysts such as Willem Sels, global chief investment officer of global private banking and wealth at HSBC, said the Fed was likely to fall short of this estimate, but Mobius disagrees.

“What is the playbook for central banks? It is very clear. Their playbook is that if you want to beat inflation you have to make interest rates higher than the inflation rate,” he said.

Central banks use the consumer prices index (CPI) as a gauge for inflation, which he argues in his latest book The Inflation Myth is a poor barometer of price rises.

However, using this metric, he said with US CPI at 8%, interest rates would have to rise markedly from here to overtake rising prices.

“It is therefore logical that [rates] will need to go to 9% interest rates to beat inflation. I think interest rates in America are going to 9%,” he said.

“I laugh when people say that the Fed raised rates by 0.75 percentage points, that’s nothing. It is just the beginning. I really do feel that rates will go up a lot from here.”

He noted however that this prediction could “go out the window” if the inflation gauge drops, which central banks hope it will.

One reason they have failed so far to curb inflation is the cryptocurrency market, he argued, which is now worth between 2% and 3% of total money supply.

“It doesn’t seem like much, but if you talk to people about what they are doing with crypto the turnover and velocity it is incredible,” he said.

Mobius argued that the bankruptcies and losses caused by and in the cryptocurrency market has tallied into the billions of dollars, which is another factor that makes it difficult for central banks to get rising prices under control, as the value of money is eroded by outside factors.

“I think it [crypto] is another factor that will make it very difficult for any central bank to reduce inflation because there is this other source of wealth without any control whatsoever,” he said.

Overall, he said central banks “are really losing the game” and that it is going to be “very difficult for them to contain the situation”.

However, he added that rising interest rates are not necessarily a death knell for markets, pointing to various times in history when rates have risen, while the market has also gained.

“There have been times in history when interest rates have been sky high but the market did very well, which is why we emphasise companies that have pricing power, have patents and can pass on costs regardless of inflation,” he said.

Looking at the current market, Mobius noted that all markets are down across the world and all currencies are weak relative to the dollar. This has had an adverse effect on growth companies, particularly in the technology sector, which makes up more than half (53.4%) of his £145m Mobius Investment Trust.

He said that the companies he is invested in are dollar earners, so have avoided the worst of the currency fluctuations, while the technology companies owned are not the type to go bust.

“There is tech and there is tech. What you saw during the heyday was a lot of IPOs [initial public offerings] of companies that were really not earning anything and didn’t have a high return on capital. They were not growing earnings or were even losing money,” he said.

“People were going crazy about it because they had exciting futures. We stayed away from these companies and as a result we are invested in companies with a high return on capital of usually more than 20% and that are growing, with strong balance sheets.”

This does not mean that his trust, which is down 17.3% so far this year, is completely immune to the severe market falls.

“The markets are down and when you have a situation like this all companies go down. Good companies might not go down quite as much, but they also suffer,” he explained.

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