survive inflation Author: Oh Geon-young Publisher: Page2 Publication Date: May 20, 2022
Quantitative easing and even qualitative easing, unprecedented in history, led to an excessive supply of liquidity to the market. Following the 2008 financial crisis, these policies were implemented to prevent an economic recession caused by the corona crisis. As a result, the value of assets such as real estate and stocks soared, and the Fed and central banks kept interest rates low. The bond investment was good, and the asset investment was also good. It was as if the world was making an all-out war to avoid falling into deflation while watching Japan lose 30 years.
Like the author of this book, Paul Forker's austerity policy following the complacent inflation response in the 1970s went back to the past. There have been signs of inflation in recent years, but it has not reached the level of a serious threat. When the Fed made a move to raise interest rates out of fear of overheating the economy, inflation disappeared like snow melting. In order to overcome the corona situation, the Trump and Biden administrations have opened a huge-scale economic stimulus package and support plan. However, the Fed's response was somewhat complacent, as there have been no signs of serious inflation in nearly a decade.
There is also a trigger for inflation due to recent supply chain problems. Due to globalization, each country has formed a kind of division of labour, but if a problem occurs in one country due to the lockdown measures caused by the corona crisis, disruptions in the overall supply chain are inevitable. In particular, the strict containment measures due to China's 'zero corona' policy and the competition for supremacy between the United States and China made this situation seriously. Meanwhile, rising asset values due to excessive liquidity have led to early retirement, and direct government subsidies have resulted in people not returning to work.
How will the inflationary threat, which has come for the first time in 40 years, unfold in the future? Although the Fed has been consistent with a somewhat complacent initial response, it has decided to respond modestly and promptly to signs of inflation. Therefore, it is a foregone conclusion that the bank will begin recovering liquidity through interest rate hikes. However, if interest rates are excessively raised to respond to inflation, it can cause serious problems in economic growth. A Fed rate hike will lead to a stronger dollar and negatively affect emerging economies.
From an investment point of view, what will you do? The author guides which investment is right from a macroscopic perspective. First of all, in these times, lump-sum investment should be avoided, and investment should be diversified. If we said there was no inflation, we simply decided to invest according to the two scenarios of high-growth, low inflation and low-growth, low inflation. However, inflation gives homework to respond to four scenarios: high-growth high inflation, high-growth low inflation, low-growth high inflation, and low-growth low inflation.
If we divide the stocks of investment into stocks, bonds, and raw materials, the author sees stocks as promising in times of high growth. It can be interpreted that the fruits of economic growth are reflected in stock prices. Bonds are promising in times of low inflation. Given that bonds generally fall in price as interest rates go up, it's not going to be a good return in times of high-interest rates and inflation. Raw materials can respond to periods of high prices, that is, periods of inflation. Commodities such as gold and crude oil are targeted. In addition, it is the dollar that can be said to be the final safe asset.
I think there is a lot of need to read macroscopic changes in investment. After knowing the general direction, it will be necessary to focus on the micro and make a profit. There was a lot of sympathies, but in fact, we need to think about whether inflation will be seen as a short-term and temporary phenomenon in the future. Like the author, I will try to catch inflation early with the Fed's prompt response, and I hope that will happen. However, it reminds me of Charles Goodhart and Manoz Pradan's 'Population Reversal, Inflation is Coming'.
In fact, inflation has disappeared for nearly 40 years, and even deflation has been a concern. What was the root cause? In a book I read before, someone once asked Warren Buffett what he would choose if he wanted only one piece of data to predict the future. At that time, he said without any hesitation that it was a population trend. The population is the most important clue to the future. What I want to say is that the most important thing is demographic change. It is that there is a demographic change behind all of these, such as inflation from deflation that has been going on for a long time, from low to high-interest rates, tax burden due to population ageing, and sluggish economic growth.
The integration of China and Eastern Europe into the global trading system, the entry of baby boomers into the labour market, the improvement of the dependent population ratio, and the increase in female employment over the past 40 years have resulted in the largest positive labour supply on record. This has resulted in falling interest rates, rising asset values and increasing unpleasant inequality. However, what we need to think about is whether there is a place to play the role of China and Eastern Europe in the future. Will India and Africa be the alternative? However, considering the lack of administrative power in India and the unfortunate situation in Africa, it is difficult to expect such a role.
In the next 30 to 40 years of our lives, a different factor will be the norm: inflation. Therefore, we will need to gain insight into what strategies will be needed to survive these times. This book is about current events, so I hope you read it as soon as possible. Due to the nature of these books, even after a few months, the contents can become a thing of the past.