RE:RE:Inflation and the Intelligent InvestorThanks Cpeczek!
The inverted 2 year and 10 year yield curve has been correct in predicting a recession something like 7 out of the last 8 recessions and something like 22 out of the last 28 recessions.
The problem is that it is not very precise as to when the recession will hit if it is correct nor how deep or long it could last assuming if it is correct to start off with. You also know I don’t believe in market timing and focus on the long-term aspects of the company and not the economy. The economy is what I consider “noise”.
Recessions come and go. They are not to be feared.
As for you second question, more people means more spending and more money chasing the same amount of goods (supply chain issues). This is inflationary. The world is going to de-globalize to a certain extent. We can’t be held hostage to China lockdowns and the effect on the supply chain forever. This also is inflationary.
Longer-term, technology is disinflationary. Technology allows us to do more with less people. Technology is in everything and will help offset other inflationary trends. To what extent? Only time will tell.
As for you third question on interest rates, they will rise very materially in my view. It has only started.
I remember writing a post some time ago saying that while the experiment of lowering interest rates to almost zero in response to the Great recession that hit us hard in 2008 was necessary and the correct thing to do but would turn out to be extremely inflationary. You can’t lower rates to almost zero and do multiple rounds of quantitative easing without inflation coming back. We just did not know when.
Then you add COVID and every man, woman and dog getting CERB and again you knew that it would eventually hit us. The lockdowns in China resulting in major supply chain problems was just the last straw.
Inflation is here. It is real. It will take time to go but it will go. In my view there is only one way we can get inflation under control to allow the longer-term disinflationary tech forces to set in and that is to voluntarily cause a recession by increasing rates to a high level. This will get the jobless rate up and bring inflation down.
If I were the Governor of the Bank of Canada that is what I would do. A self inflicted wound done on purpose. Cutting off a foot to save the rest of the body so to speak.
Get used to not only 50 basis point hikes but likely 75 basis point hikes as well.
I don’t know the future, it’s just my view.
Hope this helps.
Have a great rest of your weekend Cpeczek