NOW DEFLATION??Oct 21, 2022
Everybody talks about inflation and BeeWyzer has taken this risk seriously very early on – see our respective blog posts on the topic.
Now we would like to discuss and share the opposite view – as recently mentioned for example by star investor Cathie Woods in various interviews.
Here is her reasoning: she sees the FED much too adamant in fighting inflation, that would be a transitory phenomenon only. This would in turn drive the US economy into recession and deflation, as already indicated by car prices going down. Surplus goods in stock of retailers will ultimately have to be sold off at discounts, driving deflation further. The high external value of the US-Dollar would drive commodity prices down, adding a dose of imported deflation.
Cathie Woods sees inflation instead triggered for the rest of the world, as many countries have issued USD-denominated bonds and face higher redemption values in local currency now.
The star investor gives a convincing line of argument, but tries to tackle an extreme complex world with rather short and limited economic arguments.
Here is what she misses out on:
- The US economy is still the most important one on the planet - next to China. A recession here will automatically trigger weaker economies in other countries, the US trades with, thus tampering or even ending inflation also there.
- The US job market is buoyant and shows no signs of weakening so far. Probably no other country is better positioned to benefit from the war in Ukraine. This is not a good spice for the deflation soup.
- USD-bond issuers outside the US may redeem or refinance: with new bonds replacing the old ones, their balance of payments would not be affected.
- In an increasingly multipolar global economy, the external value of the US currency shows a decreasing importance as a determining factor for commodity prices. Today’s weakness of commodities is very much triggered also by the weak economies in many countries.
- All the other factors driving inflation are still in place: an exuberant money supply, interrupted trade supply chains, partial deglobalization after the pandemic shock, rising costs due to climate protection measures, sustained demand for copper and rare earths due to the increasing electrification of individual traffic and the digitalization of everything.
From an economist point of view, deflation is even more dangerous than inflation. So, it would be good if Cathie is proved wrong. The best outcome would, of course, be a world that proves Cathie not completely wrong: Maybe the effects she stresses will help to dampen inflation without turning the world economy into deflation at all. Thus, the optimistic views many central banks earlier on communicated, describing inflation only as transitory, would come true in the end. However, the time horizon would definitely be longer than they expected. For the next 12 to 24 months inflation should stay on the agenda, maybe controlled by some of Cathie’s factors. What comes after this, no investor is able to predict. But wild guessing can be a lot of fun sometimes, right?
This is why our advice does not change substantially:
- Avoid or hedge asset classes most hit by inflation
- Stay liquid even if it means facing cost: financial losses are often bigger than the effect of inflation taking value off your money
- Apply intelligent ways of managing liquidity in order to limit this loss of value (see our former blog posts on this)
- Continue investing in long-term growth segments via well managed companies
- Tackle the overall task of asset protection, if you have not already done so
- Spend money on things that you like: the fun you have today will not be eaten by inflation nor taxed by government or destroyed by external shocks in the future. And happy memories stay in your mind forever.
- If you need more knowledge and wisdom on what to do, turn to BeeWyzer trainings
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