Is inflation transitory?

Is inflation transitory? And if so, will the Fed avoid raising the key interest rate? I do not think so, the interest rate must rise anyway, but more on that soon. To begin with, inflation is not transient, not with a reasonable interpretation of the word and the concept.

The rate of price increase for American consumer goods is currently 7.5% at an annual rate. The measured rate will probably decrease very soon, perhaps the peak has already been reached, but prices will still continue to rise at a historically high rate. Not 7.5%, but well 4-5%. As a consumer, you will thus not experience any transient, "transitory", inflation. When prices after one year by + 7.5% rise 4-5% to the following year and 4% the year after that, it will be difficult for normal households to make ends meet. Wages simply do not keep up with for most people. And should the price increases actually have a significant positive effect on wages, an inflation spiral will start where price increases will return with renewed vigor. The company must compensate for its increased wage costs in some way - ie with higher prices and fewer employees.

It does not have to be a really vicious spiral like in the 1970s. The process may well stop at a few years of persistent price inflation, slightly lower sales due to it, and slightly higher unemployment as a result of companies' need for cost control. From a stock perspective, such a development is hardly alarming. It is then only a matter of investing in the right sectors, which are inflation-protected, or at least not excessively sensitive to inflation. Raw materials are well placed, especially critical materials for our high-tech future - so-called MIFT companies. Consumer goods, not least entertainment and travel, as well as cyclical industries can, on the other hand, make it more difficult. This also applies to technology shares whose high prices are dependent on mortgaging and low discount rates in the valuation calculations.

However, inflation is only one ingredient in the macroeconomic salad. Another very important factor is the Fed's monetary policy. Will the Fed e.g. stop buying assets completely, maybe even net selling or even worse actually selling off part of the holding, so called Quantitative Tightening? Well, the last thing is to go one step too far in the stock market dystopia. But will the Fed raise interest rates and if so, how much? If the Fed actually follows up on its unusually clear communication about austerity, it is likely to have a major effect on the valuation of shares, where value creation is primarily well into the future. Technology stocks, software, computer games, betting and previous pandemic winners, which are traded at high P / S ratios (stock price-to sales-ratios), despite low or negative profit margins, have mainly been traded up to these levels in the absence of other alternatives when interest rates have been low and other sectors have been relatively stable. TINA = There Is No Alternative has been in place since the turnaround in March 2009, when the Fed and other central banks decided to do anything to support the financial markets. But now the Fed and the ECB seem to have actually reached the limit of how much they can stimulate the world's billionaires and those in power at the expense of the more or less destitute masses.

With 7.5% reported price inflation and bottlenecks in several important places in the global economy, e.g. semiconductors, transport services and raw materials for electrification and green conversion, the economy must eventually be tightened. Rarely have central banks been so clear that austerity is coming, and never have brokerage firms been so willing to play along. Most banks now officially report forecasts of five (!) Interest rate increases already in 2022 and another 3-4 next year. Some are talking about as high as a 3 percent policy rate in 2024, and the consensus is over 2%. If the Fed were to go that far, we should all expect a veritable stock crash at least on a par with 2002 and 2008. It would make 2018 and 2020 look like a bit of a cozy exercise. Given the latter, luckily it will never be like that. It is much more likely that an initial sharp decline of around 35% at the index level will be answered with new record stimuli. But before that, the Fed is required to show determination in the austerity measures, which is exactly what makes the price falls really noticeable. I see Pandemiraset as a reasonable template, although more protracted in time to almost a year and with many tricky rather intense rallies - bull traps.

To sum up, I expect the Fed to try to regain market confidence as a serious authority by convincingly reducing QE (i.e. Quantitative Easing) to zero and implementing at least some interest rate hikes. The Fed can probably not do anything else as it looks now, with the current inflation rate and the reluctance of the stock market to take the threat of austerity seriously. The stock market shouldl respond slowly, skeptical that the Fed will keep a straight track in the chicken race, but in the end I think that even the "generals" will also fall heavily, i.e. the largest US technology stocks, those that almost individually lifted the stock market to record levels. Meta Platforms has already shown the way, but Microsoft, Nvidia, Netflix, Amazon, Alphabet, Adobe and Apple could have a long way to go before they are reasonably valued - not to mention Tesla, the number one cover boy of the unreasonable rise.

But when the generals finally accelerate downward, when the Fed is taken seriously, and the prices fall heavily, reasonably along with the entire cryptosphere, then the Fed is forced to turn around completely. Then everyone will agree that it is the only solution. Yes, everyone except US economist Peter Schiff, who wants to let everything burn to the ground - everything except his pile of gold. When it comes to "crypto", I mainly think of all currencies and projects except Bitcoin, Ether and a few more. But even these cryptocurrencies, I expect, could plummet to frighteningly low levels if the Fed follows up on its statements with actual action over the next twelve months. I insist that Bitcoin could probably be below $ 20,000 and Ether below $ 1600. Even gold can probably fall quite a lot in nominal terms, i.e. in USD, even if the exchange ratio for gold versus shares and crypto improves significantly.

And somewhere, in maybe nine months, or twelve, when the Fed gives up and stimulates in a way we may have never seen before in a modern economy, well then it's time to buy gold, crypto, critical real assets, real estate and well-selected stocks that can survive and grow on their own. It is difficult to decide completely in advance, but some old winners will not rise again, although many will of course do so. And some never-beens will surprise in their role as the new bubble generals.

What we see in the market right now is partly war-driven, but in practice a little geopolitical turbulence does not usually mean much for the stock market. I therefore believe that the Ukraine situation is mostly the starting shot for the main issue "FF22", the big Fed case 2022. As usual, there will be many false starts, dead cat bounces on peace jumps, on hopes of slower pace of austerity, and so on. But overall, the stock market is learning to look lower and lower downwards, sometimes at an accelerating pace, so-called "Capitulation race" or "vomiting". However, the real bottom will typically not come until the Fed is assumed to give up, or until it is very clear that it will soon have to give up. That's when the Fed starts holding crisis meetings on weekends, when some banks get into trouble, when big pyramid schemes are revealed - and especially if or when the Nasdaq generals fall headlong, "vomiting" out of the big index portfolios.

During this process when nothing works, when everything turns into Value Stocks, that's when gold can have its time in the sun. It is only in a capitulation climate that a dead asset without interest can be accepted by the large asset managers' customers. Then they no longer feel that all time as a gold owner is lost growth or interest time. And when gold is accepted and gradually begins to move upwards relative to all other risk assets, well then a domino effect can be set in motion, with an increasingly strong inflow to an ever larger and more important asset class. Yes, if the Fed is serious about its austerity and then forced into the mother of all stimuli, then the resulting stagflation could eventually force the rush into gold that Schiff and his father have dreamed of for 40 years. But as we gold proponents usually say "40 years in gold is just a wink".

@Mikael Syding