The market is in a very weird mode at this moment. The US currently faces many issues today, ranging from unstoppable Covid-19 spread, uncertainties with presidential election and vaccine, a huge deficit increase, and pretty sizable currency decline which will impact corporate earning, yet the market ignores all of that and keeps on going up. Like a drug addict, it hopes for another shot of stimulus bill and federal reserve money pumping. It seems that the whole economy is based on money creation.
Given how bad the real economy is, the stimulus bill is almost a certainty, the only difference is the timing and the size. “B” (Billions) is no longer enough, everything starts with “T” (Trillions). As I mentioned in my last blog, we blew past multiple years of money printing within this year. Luckily since the GDP is shrinking and the velocity of money is slower, even with trillions of money printed, we are more coping with deflation than inflation. We see that worldwide from negative Eurozone interest rate to China, which is experiencing its first deflation in 11 years. In addition, more and more global economies are driven by tech which is deflationary in nature. For now, Money can be printed without impact from roaring inflation in the short term.
But if history is a guide, we can see this does not last forever. Below is the interest rate chart for the last 100 years.
As a society, we go through cycles every 75 to 80 years. If you are interested in this concept, you can read Ray Dalio on his big debt cycle or Fourth Turning theory. Last cycle started with historic money printing to support World War II in the 1940s. But it initially had no impact since the world was in a destructive mode. But once the war was over, the loose monetary policy translated into hyper-inflation. We had a low-interest rate environment in the 1950s, but eventually, the inflation jumped. In turn, the interest rate went from under 3% in the 50s to 12% by the early 70s and then close to 20% before 1980.
I think we are still a year or two away before a true inflationary cycle. But because the market is much more compressed these days compared to historic time, when it happens, it behaves explosively. We can see that explosion in stock market this year. It is worthwhile to slowly accumulate commodities that go beyond gold and silver, and extends into investment themes such as crypto currency like bitcoin, agriculture commodities, even water-related investments that I had in a previous blog. In the next 2 blogs, I will share some thoughts about Crypto such as Bitcoin and agriculture commodities.
Stay safe, healthy and wealthy!