How much would higher immigration rates help stock markets? “ROGER MONTGOMERY

How much would higher immigration rates help stock markets?

In this week’s video preview, Roger explains how the fate of stock markets now depends materially, but not solely, on the employment situation and how central banks are dealing with the very serious choice they have to make between the inflation or recession.


Roger Montgomery:

Immigration. It is the most practical solution to the wage pressure currently being felt in the developed world, the pressure which could entrench inflation through a wage/price spiral. You may have noticed that expected immigration is not increasing. From the UK to the US, New Zealand and here, the world is full of jobs and no one to fill them. As a result, companies are being forced to pay more, workers and unions are demanding more, and already high supply-driven inflation justifies demands for real wage growth.

So what happened?

Well, you may recall that during the worst part of the COVID pandemic, Australia was one of many countries that offered tax support to unemployed or underemployed people. Here in Australia, it was JobKeeper that kept the economy going. However, temporary visa holders, including international students, and casual workers who had not been employed for 12 months were notably excluded from the scheme.

More than a million people in Australia had temporary visas and they were excluded from government support payments; this represents approximately 500,000 international students, 140,000 working holidaymakers, 120,000 qualified temporary entrants, 200,000 bridging visa holders (who were largely partner visa applicants or asylum seekers) and over 16,000 holders temporary protection visas (commonly known as refugees).

Without support, many have simply gone home and many may not want to return. Meanwhile, those wanting to return, or visit for the first time, face huge airfares thanks to limited airline capacity and international air travel operating at around 40% of pre-pandemic levels.

The longer the situation persists, the sooner inflation changes from being solely a supply chain problem – outside the control of central banks – to becoming a more endemic demand-driven problem that central banks will be forced to act more hard to control.

The fate of stock markets now depends materially, but not solely, on the employment situation and how central banks deal with the very serious choice they have to make between inflation or recession.

The US Federal Reserve is very focused on inflation, which is currently at 8.6%. Just recently, Federal Reserve Chairman Jerome Powell said he would not let the economy slide into a “higher inflation regime,” even if that means raising interest rates to levels that put growth at risk.

The US central bank has shifted to a do whatever it takes approach, with Powell saying: “The clock is ticking on how long you will stay in a low inflation regime… The risk is that due from the multiplicity of shocks, you start moving to a higher inflation regime, and our job is literally to prevent that from happening and we will prevent it from happening”.

Thanks to this very tight labor market, demand remains strong and supply chains cannot cope. As a result, what was previously thought of as transitory inflation takes root. Higher wage demands come next and then… a wage price spiral. A slowdown in the economy is needed to drive down demand, and a recession, particularly in the US and Europe, could be inevitable as the US central bank leans towards killing inflation at all costs.

Meanwhile, the liquidity that was injected into the financial system and the economy during the pandemic is being withdrawn. The US QT “officially” started in June, but the “effective” global balance sheet has already shrunk by $1 trillion since December 2021. In such an environment – with money being literally sucked out of the markets – it is difficult for asset prices to rise significantly or permanently.

And none of this is about heightened geopolitical risk or a potential collapse of the Chinese economy.

The big returns come from buying low and I’ve covered extensively elsewhere on the blog the arithmetic of investing in growth amid compressed PEs. It may just be that even lower prices are possible.


Roger is the founder and Chief Investment Officer of Montgomery Investment Management. Roger brings over two decades of investment and financial markets experience, knowledge and connections to his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was written by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The main purpose of this article is to provide factual information and not to provide advice on financial products. Furthermore, the information provided is not intended to provide a recommendation or an opinion on a financial product. However, any commentary and statement of opinion may contain only general advice prepared without regard to your personal objectives, financial situation or needs. For this reason, before acting on any of the information provided, you should always consider its suitability in light of your personal objectives, financial situation and needs and should consider seeking independent advice from a financial adviser if necessary before making any decision. This post specifically excludes personal advice.

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