High Inflation - Don’t Get Too Bearish
Inflation is bullish for stock markets longer term. Yep, those of you who remember inflation spikes of decades past might recall doubling of prices across decade periods. Stock markets doubled also, they had to, the math required it.
Stock markets aren’t alone. Your home is the biggest asset you’ll probably ever buy but for some reason incumbent conservative governments and their Fed Reserves don’t care much for affordability. While the “consumption inflation numbers” hang around 2-3% they are doing their job. Well that’s like telling a kid “don’t worry, the mixed bag of lollies are only going up 2% this year”. Meanwhile you neglect to mention that the bike (his big asset not yet purchased) is going up 10-20%. All the time you know his McDonald’s wages will never catch up to that kind of asset inflation.
Governments shrug of asset inflation as good economic management that makes people rich. That’s all well and good if you are already on board and own assets that ride the liquidity wave.
There was a saying in markets. You own two houses, you’re long. Own one, you’re square. Own none, you’re short the property market.
How many liquidity booms, housing booms, commodity booms do governments need to see before realising it ends up wrecking many lives, spoiling many dreams and leading to parents working many more hours than they spend with their kids.
Sure governments and federal reserves will testify their concerns, but at the end of the day they let these assets booms go on unabated until the next collapse proves them wrong. By then it’s the next guys problem, or some other countries fault. They just hope the history books note them down as boomtime public servant success stories.
The bulk of your spend these days is twice as much as it was in the 90’s. Sure your PC and food bills might not have grown much but look at your big spends, your home and your vehicle. The big ticket items that lead to a fat mortgage and a 60 hr work week is a lot more expensive.
Here’s the drum
Inflation is (generally speaking) very bad for socially equality
When asset inflation goes up the wealth divide grows. When consumption inflation goes up the wealthy don’t feel it but the masses do.
Inflation is good for stock markets longer term
If it costs us twice as much to get things done then it costs a business twice as much also. If you want to build a business you will be paying asset plus consumption inflation prices. Thus, a built business must go up in value (risk adjusted) to create parity with starting one from scratch. Yes, this is way too simplistic (leaving sectors etc aside) but it highlights this historic market fact. Just ask Buffet if you don’t believe me.
I thought I’d write this because there are a lot of bears around and I realised many of them have never seen a recession. Sure stocks will and can remain depressed for some time but inflation will at some point drag them substantially higher, beyond what you would expect, crazy prices.
