Posted in Money on February 7th, 2018
Inflation winds measured by specific official indexes have picked up and it’s not just Paul Tudor Jones who’s seen this. Wages is lagging industries are rising along with higher prices in commodities. While one final capitulation may be expected, the low inflation era will eventually end in time for a generation that is unprepared to handle it. With many market participants unaware of how it impacts them, expect turmoil in multiple markets.
Long time readers will be thankful they read our original discussion about mining, as they took the smallest risk and are well-positioned from what’s coming. We expect a pullback in mining because as people see what’s coming, they may have to liquidate leveraged positions and miners will be part of this. We start out from this perspective because this is exactly what we saw when people thought the Fed’s balance sheet would eventually be unwound: how will this happen if unwinding the balance sheet causes turmoil with inflation also beginning to rise? In addition, how fast will inflation spiral if markets don’t feel the Fed will stay committed to unwinding its balance sheet?
Outside of miners, we’ll discuss analysis in the advanced version of Millionaire Guide To Hedging. We will caution readers that many market participants have never seen high official inflation and will react in ways many of us do not expect. This isn’t to say that unofficial inflation hasn’t been high (it has, as unofficial inflation measurements include asset prices), but that when official inflation measurements start picking up, we should expect some market participants to react negatively.
The recent dollar drop, which we predicted on A.P., is only a preview of what’s to come. And this does not mean that the dollar can’t rise for a bit before resuming its drop either. With a national debt of about $22 trillion, the world may have trouble thinking of the dollar as a safe haven currency when things turn sour. Mindsets don’t shift overnight, but the preview that was clear the last few days showed us and others that people are beginning to change their financial perception. How fast and how wide will this shift spread? How high will the Fed allow interest rates to rise when we consider that this would cause too much interest to be paid on the massive debt? How can the Fed control inflation if it’s stuck from raising rates high enough to offset inflation? We’re not there yet, but one can think of these as previews.
We will witness the end of the view that the dollar is a safe haven. This end will not happen immediately.
If stocks are drastically overpriced, this does not mean they can’t still march higher especially if people feel another round of QE is around the corner. But when the moment comes, even without a correction, stocks may not help investors at all. Never forget that it only takes a couple of bad days or missed opportunities.
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