Inflation vs. Deflation
For most of the past decade, as technology companies increased our productivity and China exported deflation to the Western hemisphere, inflationary pressures were suppressed. Hence, deflationary assets outperformed inflationary assets, but that is starting to change. Here is why:
Covid broke supply chains which increased the cost of materials (ask anyone who is doing a home renovation project how much the cost of wood, cement, or tiles has gone up). PC Richards is telling me it is going to take six months for my new stove & fridge to arrive. I ordered them in January, and they anticipate a late June delivery because the manufacturer cannot get the parts to build the products. The worst part is that I am expecting my third child in late June. Good times!The Fed (in my view) is trying to engineer some inflation as they have missed their target for the past decade (a little inflation isn’t bad, by the way). The cynical side of me says they are trying to move rates higher to push some investors back within the risk curve. When I hear NFTs of tweets are being sold for $2.5 mln and vintage sneaker sales are reaching $40-$50k, I know we are in trouble (i.e., rates are too low and people are way out on the risk curve). Given that the US economy is on a strong trajectory with tons of stimulus being injected into the system, I find it hard to believe that our interest rates won’t continue to climb higher. From a non-economic and selfish standpoint, I simply think investors should be able to park their money risk-free and earn 2-3%. I think the Fed is cognizant of some of these attributes and is willing to let rates rise further.
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