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Inflation or Inflation?
Consumer cost inflation is very high, and likely to continue. Cheap goods come from China, and they are in an energy crisis. That means ALL goods from China will have costs go up and export higher costs to the world. Pair that with transportation skyrocket costs and local production disruptions, everything is destined to go up. I actually do think some of it is transitory, but most things will never return to 2019 pricing. Higher prices will cause economic negative impact to profits and growth.
People are demanding higher wages for SOME jobs, and other jobs will see pressure for higher wages to adjust for cost of living. This will force some jobs to be outsourced or reduce company hiring.
Asset inflation of houses and stock market will be under pressure as people have less money to put into these assets.
China exporting inflation, then deflation.
China is the second largest economy in the world, and their entire country is pinned on the most epic ponzi scheme the world has ever seen, real estate. Evergrande is the tip of a huge iceberg as we see a domino effect of failures. The west in pursuit of returns has invested in China's real estate ponzi schemes, and China deflationary collapse will hit world. Pair these woes with China having rolling power outages and an exodus of foreign companies causing millions to lose their jobs, China is facing one heck of a deflationary collapse.
Oil, coal, and natural gas.
Fossil fuels are rising in price worldwide. Europe is facing a crisis on not having enough natural gas to make it through the winter. While some like to blame 'green power' for this, there is also many countries forcing higher prices for their gains. Russia is using their natural gas supply as a weapon to Europe, and OPEC is taking advantage of the lower gas production from the USA due to the collapse of fraking. Further coal China shortages is forcing coal prices outside of China higher as China is ordered to secure fuel "at any price".
USA - All Easy buttons pressed
The US has pressed all the easy buttons to goose the economy since 2008. Low interest rates, trillions of free money, under Trump very low corporate tax and low tax to 'pull US money' from overseas. As a result, there is very little easy buttons to press to goose more out of the economy. Does anyone really think if we enter a recession, lowing 30 year borrowing rates from 3% to 1% will spur material growth?
US dollar IS the global reserve currency
The global reserve currency status is very much mis-understood. If the US cut back issuing new dollars, it will have the effect of every other currency experiencing a rising dollar value. This will force other countries to also reduce their spending to keep their currency in a 'trading range' those countries find acceptable for pricing in the global economy. In effect, when the US cuts new dollars, so goes the world. If the US increases dollar creation, others are more able to increase their currency creation due to currency pricing compared to dollar valuation. Countries that fail to curtail a rising dollar, will pay a huge economic price as debt priced in dollars will crush companies in that country.
So if America cuts spending due to fears of debt creation, the world will also cut spending, this means a global slowdown.
US Stock markets are at extreme historically high prices
US stocks are priced for perfection for the years ahead, any realization of missing perfection jeopardizes stock valuations. Using stock market data between 1928 and 2021, stock are priced for -6% returns over the decade ahead.
The only way to kick the can, more - Free Money & demand pulled forward.
My concern is the free money train is finally going to be over, and there will be a multi-year hangover to deal with. We have heard the hard line Republicans are taking over debt, and the Democrats I don't think have the will to blow past their objections. So we are repeating my concerns on January 2021 "I expect Republicans to enforce fiscal discipline much more than they did with in 2016-2020 during 'good times'. With a crippled economy they will double down the pain in hopes of winning elections."
With free money ending, the fake demand ends, and the poverty stricken America hangover can resume.
If I get this wrong, as I did in January 2021, approval of a large enough free money bonanza could kick the market out for continuing highs until the free money isn't large enough to sustain the new day traders of 2020.
Conclusion
We are very close to a multi-year high, potentially 5+ years, with a 50% market cut (potentially 80%, but I doubt it) However monetary action does matter. if the US resumes free money for everyone the market high is likely quite a bit out. China stops the worlds largest ponzi scheme from collapsing and resumes inflating the bubble, or OPEC and RUSSIA provide maximum energy output my view would change.
Barring these actions, it is not a great time to buy for a 20% gain, but instead good to take some risk off.
Risk off can be US bonds or diversifying into growth countries like India. Alternately take a chance on a deflationary asset like Bitcoin which may do very well in a deflationary collapse. Good luck!
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