This time everything is different – ​​this time is different.” According to stock market wisdom, these are the four most expensive words in financial history.

They describe a human behavior pattern to justify exaggerated and actually unsustainable developments of the respective present.

An essential part of the narrative is the proclamation of a new era.

Warning references to historical regularities are wiped off the table as old-fashioned and no longer valid.

This is what happened at the end of the 1990s in view of the exaggerated valuations of technology companies during the New Economy and in the mid-2000s with the escalating real estate lending and the securitization euphoria associated with it.

The serious consequences are well known: the TMT bubble in 2000 and the major financial market crisis in 2008.

The same reflex has sometimes been observed in recent years with regard to global monetary policy and inflation.

Specifically, the validity of two primal economic laws was suppressed: that of the 110-year-old quantity equation of money, which goes back to the economist Irving Fisher, and the more than 60-year-old (modified) Phillips curve.

The former describes the causal relationship between changes in the money supply and inflation, the latter the relationship between wages or inflation and unemployment.

Both laws are dead, it was said more or less loudly.

Globalization is changing the financial world

Let's take a closer look at both.

First to the quantity equation of money: The identity M∙V=P∙T states that the money supply M, taking into account the circulation velocity V, corresponds to the nominal value of all transactions in an economy (P∙T).

If, in the long term and systematically, it is above the rate of economic growth, this ultimately results in inflation – i.e. an increase in P.

In the (timeless) words of economist and Nobel laureate Milton Friedman: “Inflation is always and everywhere a monetary phenomenon.”

Second, the Phillips curve.

This empirically inverse relationship between wage growth and unemployment is now mostly shown in modified form as a graphical relationship between inflation and unemployment.

First, the Phillips curve only indicates that periods of low unemployment are often associated with increases in wages and prices, and vice versa.

This observation became politically explosive in the early 1970s.

Disregarding cause and effect, the Phillips curve has sometimes been interpreted as a menu from which countries could choose combinations to suit their needs.

Legendary in this context is the statement by the then Federal Finance Minister and later Federal Chancellor Helmut Schmidt that he would rather have five percent inflation than five percent unemployment.

More relevant to the current discussion, however, is that the Phillips curve may have flattened around the world since the turn of the millennium.

Not least as a result of the globalization of the goods markets, there was less wage-price pressure than before with high employment during this period.

Consequently, some market participants have come to the conclusion that this trade-off no longer exists and that the Phillips curve belongs in the mothball box.

Central banks under pressure

Today, however, we see: Both principles live and are jolly!

Inflationary tendencies have been discernible for some time - initially on the financial markets based on asset prices, but recently also increasingly in the cost of living.

Temporary pandemic effects may have contributed to this, but only in part.

And the Phillips curve has indeed flattened – but this can become a problem with inflation now rising.

Because it implies that central banks may need to take more action than they have in the past to contain them.

Meanwhile, it is becoming increasingly obvious that the monetary course is turning worldwide.

The Bank of England has already raised interest rates by 0.4 percentage points since December and the US Fed is expected to start tightening in March.

The ECB is still holding back, but is also coming under increasing pressure to act.

During the February meeting, it had to admit that the rise in inflation is stronger and possibly longer-lasting than previously assumed.

Unlike before, interest rate hikes can no longer be ruled out for 2022.

In addition, the US central bank is due to reduce its balance sheet in the near future, to which the financial markets could also react with nervousness.

All of this has consequences for the investment.

The sometimes very high share valuations have been under pressure since the beginning of the year: growth stocks in particular have suffered, while value stocks have held up better after years of below-average performance.

Despite all the uncertainties caused by the pandemic, the economic signs are not yet pointing to a significant slowdown or even a recession.

Dividends remain an important source of income.

Therefore, investors should bear with the correction - even if it lasts a little longer and goes deeper - within the framework of the strategic allocations.

Nevertheless, it is advisable to react tactically within the framework of flexible risk budgets.

Further options for action for a possible fall on the stock markets are anti-cyclical rebalancing and disciplined, regular saving on shares.

However, the sine qua non for this is a balanced portfolio structure tailored to individual risk-bearing capacity.

In other words: diversification and a long-term perspective remain essential - regardless of whether the times are perceived as normal or different.

Another ancient law!

The author is CIO Multi Asset Europe at Allianz Global Investors.