Inflation is taxation without legislation
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TALKING to many traders and investors over the last week, one thing is for certain – inflation is on everyone’s mind. Not just locally after the South African Reserve Bank last week hiked rates up 25 basis to 3.75 percent, but also globally after the US Consumer Price Index inflation rate soared 6.2 percent since this time last year.
This is also the biggest jump in almost 30 years – crazy to think the US 10-year treasury yield is only at 1.592 percent.
Before we get into how we could make money out of it, let’s look at the basics:
What is inflation?
“In economics, inflation refers to a general progressive increase in prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.” – Wikipedia
What caused it?
Some people think it is because of quantitative easing – basically the trillions of dollars global central banks have printed to stimulate the economy post the 2008 market crash which went exponential after the initial Corona Crash of 2020. Until then the economy was in a deflationary cycle, and since the funds didn’t actually make it through to the “real economy”, there has been the massive divergence between markets and property valuations and the average Joe on the street.
Transitory or here to stay?
The only thing that’s certain is that both camps are very polarised, with some sitting in the transitory camp (i.e., it will blow over) like Carl Weinberg, the chief economist at High Frequency Economics, who is quoted on CNBC, as saying, “Let’s not be influenced by hysterical people like Larry Summers, who are telling us that inflation is taking off. Let’s listen to what the people who actually are making policy are telling us”.
UBS Group AG chairperson Axel Weber said: “The world may see ’uncomfortably high’ rates of inflation for one to three years” and about six months ago market legend Paul Tudor Jones told CNBC that he was "really concerned arguing that inflation is transitory“ with inventories at a ”record low“ while demand is ”screaming".
One thing, however, is for certain – investment managers and traders are going to either make or break their careers on their bets going into this, with so many unknowns like:
- Is gold going to be an inflationary hedge like it historically has been?
- How will bitcoin react to higher inflation coming out of the US, i.e., will more Americans move their dollars into bitcoin?
- Where should big pension funds put their money - into inflation-linked bonds or normal treasuries?
A few things that we do know is that there will be a lot of volatility in the markets, which would be great for traders but tough for investors. Historically speaking, value tends to outperform your growth stocks, with sectors like consumer staples being able to pass the cost off to their customer base and maintain margins.
The million-dollar question – how do you align portfolio?
Only time will tell, but what we can expect is volatility and where there are volatile markets there is always opportunity. Keep your eyes open for them.