Decoding Inflation and discussing potential solutions against this not so silent monster

Inflation - This one all pervading phenomenon is creating havoc everywhere and financial markets seem to be the latest victim.

Here’s what I think about the situation :

Everybody is pressing the panic button

The condition has become so fragile that all the central banks are now pressing the panic button and hoping (praying rather) that things become okay soon.

Stock Markets have become so crazy that a 50 bps rate hike (after 20 years) was seen as a dovish policy and rallied so hard only to realise a day later - It is 50 bps :slight_smile:

And the above reaction from the stock markets is understandable considering the fact that the drubbing off late in markets like NASDAQ is so horrible that previous crashes seem lot bearable than the current crash.

Now - What’s causing it ?

Short and sweet answer would be - Lot of things (things that have maybe started years and decades ago)

I’ll just list a few of the major ones below : (please share other ones if you i missed something )

  • Massive Currency Printing.

  • Pandemic induced supply chain issues.

  • Pent up demand.

  • Freebies by governments across the world ( A controversial point but, nonetheless plays a major factor)

  • Of course, The latest entrant (War)

What are the central banks doing to fight inflation ?

If I were to sum it up in a word or two - It’s Damage Control.

https://twitter.com/CryptooIndia/status/1517551677024649216?ref_src=twsrc^tfw|twcamp^tweetembed|twterm^1517551677024649216|twgr^|twcon^s1_c10&ref_url=https%3A%2F%2Fwww.realclearpolitics.com%2Fvideo%2F2022%2F04%2F22%2Fimf_director_maybe_we_printed_too_much_money_without_thinking_of_the_unintended_consequences.html

Central bankers know they have taken things too far and the only way they can do is raise rates now , cut down their balance sheet and hope that inflation magically disappears. Voila :stuck_out_tongue_winking_eye:

Will it work?

I hope it does. But, it is kind of like going to a competitive exam without much preparation and hope that others don’t show up and we do well in our exam. there are just too many bigggg ifs.

Can rate hikes address the issue of resource shortage and supply chain issues? No, what it can do is - make prices of various assets (esp.financial ) low due to demand destruction which later translates to lower prices in essentials. but, there’s a catch here - what if there is the issue with supply side dynamics like war, lock-downs etc continue. This acts like a double whammy.So, yeah - rate hikes do help a bit in stabilising the economy in the medium run but at the same time it kind of slows down too.

What can we do as Investors to navigate this high inflationary phase?

Inflation isn’t entirely bad though. There are always winners in some pockets and quite a few sectors and industries make a killing during high inflationary phases and maybe those are places where we have to stay invested to weather the storm which is underway currently.

Margin of safety becomes the key in these scenarios and dividend paying companies and low debt/debt free dividend paying companies along with beneficiary sectors of inflation can be kept on radar

What are the solutions at a larger level against Inflation? (Food for thought)

With pandemic, war and its consequent geopolitical tensions, I think the world is trying its best to de-globalise and reduce dependency on other countries. So, far this experiment hasn’t been too successful as most of the economies are reeling under the pressure of multi decade/all time high inflation.

I think - Going forward , the following themes are something that are play out (its my hunch) :

  • We may see the re-emergence of good old system of barter system between many nations esp. the friendly nations as more and more countries will now have to pick sides in a rapidly changing world order.

  • Reduction of dependence of dollar and increase in usage of other assets including gold and crypto.

  • Development of undeveloped and resource rich emerging economies. (At the end of the day, we need resources as they are going to be the real money going forward)

  • Wealth inequalities keeps growing day n day and this model where too much of wealth staying with too few folks is also most likely. Successful models of cooperative-ism like amul may emerge to tackle this issue.

What according to you are the other solutions that we can have to tackle inflation on a sustainable basis? Let’s have a discussion on potential solutions :slight_smile:

5 Likes

Continue to keep investing in stocks/business where you know the business to a great extant. This is the only way to beat inflation for a retail investor.

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When in inflation, companies will raise capital through debt to survive. This means debt funds will give good returns.

Does this statement make sense? If not, what am I missing here?

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Inflation is Nothing but an expansion of currency supply.
Pretty much all central banks US fed , bank of England even RBI printed too much money under quantitative easing. Even our RBI is no different and just gives different names like government securities acquisition program (GSAP). All keyensians are same only .

So now the central banks needs to do quantitative tightening i.e opposite of quantitative easing ,where the central banks needs to sell all those govt bonds which they bought by printing currency so that excess currency can be sucked up and destroyed reducing the currency supply and bringing down inflation. Here is the problem when central banks starts selling competing with the govt who also sells bonds , the bond prices fall along with rising yeilds. Secondly where is the currency even gonna come from and who is gonna buy so much of bonds ? . This whole scenario is impossible without collapsing the entire system.

Well it’s more of political issue , so who wrote SDL’s, T-bills, gave reservation and social programs to give resources to unproductive people instead of letting free market (general) have it , freebies economy increased the defecits all along. There was no productivity in first place. People should understand there is no free lunch and can’t go around printing currency.

Bottom-line is you can’t solve your problems printing money.

There is a simple way of dealing with inflation is going back to gold standard or silver or tangible assets that can’t printed out of thin air. If you go back in ancient rome with 1 ounce of gold, back then you can buy a fine toga, hand crafted belt and pair of sandals. With same amount of gold in present in men’s shop you can buy a fine suit, hand crafted belt and fine pair of shoes. Truth is prices of items never change.