LONDON – According to veteran investment strategist David Roche, the global economy is likely entering a “franchise” phase and markets are underestimating its lifespan.
It comes as markets try to navigate a series of simultaneous economic hurdles, including Russia’s invasion of Ukraine, soaring inflation, rising interest rates and supply disruptions due to containment efforts. China’s Covid-19 outbreak.
Speaking on CNBC’s “Squawk Box Europe” on Friday, Roche, president of the Independent Strategic Group, said that evidence of atrocities against civilians in Ukraine by Russian forces would prevent precludes any possibility of a speedy peace negotiation with Russian President Vladimir Putin.
Therefore, the West’s only option is to seek regime change in Russia, he said, as it is not possible domestically to see Putin withdraw from Ukraine without a “victory”.
“He’s not going to pull back on trade because of any of the sanctions cuts, so the sanctions stay in place and I think the corollary for Europe is that you’re going to see a recession, because the sanctions will really increase and lead to a full-blown energy blockade.” Roche said.
EU countries last week agreed to a new set of sanctions against Russia, due to reporting cases of sexual violence and torture and executions of civilians, including an outright embargo on Russian coal imports. Europe is also considering additional measures including a complete embargo on imports of oil, coal, nuclear fuel and gas.
A rocket attack on a crowded train station in the city of Kramatorsk, eastern Ukraine on Friday left more than 30 people dead and more than 100 injured. It comes after Russian forces diverted their attack to eastern Ukraine after they withdrew from towns around the capital, Kyiv.
Ukrainian officials have warned that further atrocities could be unleashed in recaptured towns where Russian troops are retreating, and Roche argues that investors will no longer be able to separate politics from the market.
“This is a big shock from the supply side that will continue in food, energy, metals and I can continue. interest rates – I think 30 years [Treasury yield] would be at least 3.5% in a year’s time – and of course, we’re looking at supply disruptions in China due to what’s happening on Covid, which people don’t talk about, but clearly It’s clearly another supply side for the global system,” he said.
‘Concession of war’
Roche thinks this will be too much for the stock markets to pull through to continue moving higher, and argues that historically high inflation will not abate as economic growth slows, as has often happened in the past few years. a normal recession.
“In a normal recession, output and demand go down, inflation falls. In this kind of recession, ‘war concessions’, you actually have output falling at the same time as costs,” he explains. and rising inflation”.
“You’re seeing that mismatch in the labor market, you’re seeing that in commodity prices, and I think that’s going to continue to drive up, so you’re facing a very bizarre situation. It’s strange that central banks have to choose between their inflation and growth targets.”
Investors have been closely watching central bank comments to gauge the likely pace of monetary tightening as policymakers try to rein in inflation, but Roche said that any discussion of whether policy rates will “break through” in the coming years is “too early”.
“When the pain becomes extreme for the output and performance, growth side of the economy, of course they will fall back, but I think it will take longer than what the stock market shows,” he said. hypothetical securities”.
