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Inflationary Boom ahead?

Updated: Oct 31, 2023

On MKTS, Howard Marks thoughts on things I find as interesting as any right now; and agree with many things he says in his latest missive to investors; "These days everyone has the same data regarding the present and the same ignorance regarding the future.” That pretty much sums up the current state of affairs. At the same time I’m not at all troubled saying (a) markets may well be considerably lower sometime in the coming months and (b) I’m  buying today when I find good value. I don’t find these statements inconsistent.


So, yes, expect a continuous tug-of-war between the bulls and the bears, and the result rarely goes in just one direction. After the optimistic buyers of the initial dips have responded to the low prices and bought, the pessimists will find the new, higher prices unsustainable and engage in another round of selling.


Remember it took until mid-May 2007, or almost seven years, for the stock market to regain the September 2000 highs, and it took until mid-March 2013, or five and a half years, to regain the highs of October 2007." But this IS an Active mangers opportunity.  Fail to perform or act now and forget your Active fees! 3 Things. • The risks in the environment are recognized and largely understood, as Nutstuff has described known unknowns vs unknown unknowns. • Prospective returns have turned from paltry to attractive (for example, the average yield on high yield bonds ex. energy has gone from 31⁄2% to almost 9%), • Security prices have declined, and investors have been chastened, causing risk-taking to dry up.  Gavekal I think make very good points here on what to think and moving forwards; ; so am sure will forgive me parroting some: 


Remember the American military officer in Vietnam who explained US tactics by saying "it became necessary to destroy the town to save it?" Well in the not too distant future, we may have to accept that our economic policymakers have adopted the same tactics in the battle against the Covid-19 pandemic.

In recent days the Chinese city of Wuhan has emerged from its lockdown, Austria and Denmark have begun to ease their public health restrictions, and other European countries are drawing up plans to follow.


The evidence is mounting that in many countries, infection rates have peaked and are now in decline. If so, then for the developed world, it is possible that the pandemic could largely be over in another six weeks. 


If correct, this will be very good news-at least on public health grounds. But if the pandemic really does end by late May, then the policy response to the outbreak will leave developed world economies in one hell of a mess, although quite possibly not in the way most investors now think.

The French philosopher and anthropologist René Girard described the havoc wrought when a population succumbs to what he called a "mimetic crisis," when rational individuals are subsumed by the irrational crowd, and everyone runs around shouting the same slogans and looking for the same scapegoat.


As we know, financial market participants are prone to the occasional bout of such collective imitation (characterized by market "tail" conditions;  But now we must ask ourselves whether in their response to the current pandemic politicians, public policymakers, central bankers and much of the media have also succumbed to a full-blown mimetic panic.


Because if the outbreak really does come to an early end in the next month or so, investors will be left to deal with the aftermath of a massive public policy over-reaction. *  Central banks have printed money as if the world was coming to an end. *  Governments have thrown caution to the winds and are subsidizing incomes for everybody, on the grounds that if no one can work any more then at least everyone should have money in their pockets (presumably to buy all the goods and services that nobody is producing. 

Now consider what will happen if the pandemic does indeed come to an early end. Governments will continue with their elevated spending, even if it is no longer necessary, and even though their economies' output gaps will very quickly vanish entirely. As a result, commodity prices will shoot up (together with the most ravaged sectors of the stock market: airlines, tourism, energy, etc.). And inflation rates could double in no time at all-even as official policy settings are entirely geared for the risk of deflation.

The result will be one of the biggest and most brutal bond bear markets in history, with only those countries where policymakers have not succumbed to the mimetic panic likely to escape the rout. And central bank bond-buying in an attempt to prop up the markets will only add fuel to the conflagration by generating yet more excess money. As a result, almost every country in Southern Europe will find itself caught in the mother of all debt traps, which will make the survival of the euro very, very difficult indeed.

So, governments and central banks have adopted policies that would have been needed if we were entering an old-fashioned deflationary bust. But if the pandemic does indeed recede in the coming weeks, we are instead more likely to find ourselves powering full steam ahead into an almighty inflationary boom.


Like the French generals in 1940, our policymakers have prepared for the last war, and are likely to find themselves fighting an altogether different conflict on an altogether unexpected front-for which they are woefully ill-equipped.

To hedge against this scenario:  *  Own short-dated inflation-indexed bonds. *  Own gold.( and Silver).  *  Own energy shares."Hated value! " *  Own short duration assets including cash and value stocks in Japan but excluding financial stocks  everywhere, as yield curves could invert pretty quickly. *  Move as much money as possible into bonds and equities in emerging Asia. *  Hold Chinese bonds to play the revaluation of the renminbi.


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