It is no news that the leading developed countries are facing unprecedented levels of inflation. The market has not yet fully priced the dramatic repercussions of rampant consumer prices. The original narrative of transitory inflation is no longer valid. The real question that drives investors hazy is: Where and when will the inflationary bubble end?
The latest inflation figures for March delivered bad news. Germany, Europe’s leading economy, announced a level and inflation above 7% compared to 5% in February. The war in Ukraine seems to have bigger repercussions than anticipated and most Western countries are not yet ready to cut all ties with Russia’s fossil export and hedge against the consequences. It is only a matter of time until the official inflation climbs above 10%. When compiling all the effects of the money printing strategy over the last two years and the Russian sanctions, the results are not encouraging. Thus, inflation of 20% by mid-2023 is a plausible scenario.
What can we expect in the near future?
The Fed and other central banks aim to curb inflation by a series of interest rate hikes over the past 18 to 24 months. An increase of the benchmark rate above 3% is the central scenario expected by the market. The timing and the size of these hikes are yet to be announced. Nevertheless, Fed’s effort could have less effect on inflation. The main reason is that by the time the interest rate increases, inflation will be boosted by scarce commodities supply and a dislocated global supply chain. This will throw inflation into a dizzying upward spiral that could dwindle the very foundations of leading convertible currencies.
The expected increase in interest rate will reduce the loan pipeline for both businesses and individuals. Credit will become more expensive and banks will be more reluctant to underwrite debt. Therefore, it is not unlikely to observe a significant reduction in the money supply available to the real economy. Moreover, the interest rate hikes may not suffice to curb the inflationary trend. Therefore, a scissors effect could occur, whereas consumers may be hit with hyperinflation and at the same time the money supply could be scarce.
A soft landing is what Powell and Co aim to bring the US economy back to normality. Ideally, inflation should be slowly controlled without plunging the stock market into a massive dip and avoiding a recession. It seems that by all means and taking into account the unforeseen effects of the war in Ukraine, the soft landing is no anymore on the table. If the inflationary trend does not respond to the initial hikes, the Fed will have no option than to inflict big increases in interest rates, similar to what Volker did in the early 1980s. Obviously, such action will not go unapprehended by the financial market and could trigger a big sell-off.
Since the pandemic outbreak, real estate has become a safe haven, especially for retail investors. The perspective of transitory inflation and the low-interest rates environment generated a lot of momentum in the real estate market. If the mortgage market dries up, the real estate could enter a downward cycle. Investors may be tempted to sell real estate and turn it into liquidity, which by that time may become scarce.
The overall macroeconomic picture is far from being optimistic. Hyperinflation juxtaposed with a serious contraction in GDP will result in long term stagflation. Despite being attacked over time by many more-or-less competent detractors, crypto nailed its colours to the mast. The global economic situation might be such that the only viable vehicle for storing value is Bitcoin. There are many signals pointing out that crypto may play a bigger role in the future. In particular, the past 12 months showed significantly lower volatility compared to previous year.
The Fed is pushing a variety of workarounds that would inject trillions in new money into the economy while bypassing the banking system altogether. Time will tell whether or not this will succeed. Meanwhile, a serious danger lurks around the corner. Once the recession is over, the lending will start again. With fractional-reserve banking and limitless supplies of cash on hand, we will likely see the overall price trends reversed, from deflation to inflation to possible hyperinflation. Llewellyn Rockwell, American author, editor, and political consultant
10-years Treasury yields hit their highest level in three years, while
technology stocks were moving into negative territories. Since
November 2021, Nasdaq had a rather bumpy trajectory following an overall
negative trend. The Fed's hawkish announcements are not the only
reason tech shares are losing ground. The perspective of long-term inflation
represents a massive threat to the tech industries. When the purchasing
power will be severely affected, consumers will dramatically change their
way of spending. The first products that will face significantly lesser
demand are digital products. Therefore, one could expect a massive sell-off
of tech shares over the next few months.
The Dow Jones Index ended above 34,700 marking no significant move over the past week. After the initial turmoil triggered by the war between Ukraine and Russia, the market calmed down and showed signs of stability.
Bitcoin ended the week above USD 42,000, moving back into a coupling mode with the other markets. The leading cryptocurrency showed resilience amid a critical situation.
The Gold ounce ended the week on a positive note, below USD 1,950, amid technical sales and an overall bearish path in commodities prices. However, the foreseeable commodities crisis and the inflationary context are good arguments for a rally in gold prices.