Saturday, April 25, 2020

Can inflation emerge after coronavirus-covid19

Since Paul Volcker era, on 1980 the interest rates had been in a downside spiral with small correction or increases in interest rates, but not enough to close the gap.

Since then, there were 3 clear long downtrend in the interest rates, and there were small peaks on the 2000 and 2006 year, mainly on the bubble era and the subprime mortgage era.

Since mid 2017, the FED has also been increasing the interest rates on a slower pace till mid 2019 when some kind of downtrend in stock market was approaching.

Remember the two small correction of 2018 due to the complications that were in the REPO market, the liquidity has been disappearing and thus the market was getting nervous

Nowadays, we are experiencing the rapid coronovirus correction that feels like will blow up the full economy of all countries of the world. The sentiment is like no one will survive to this crisis, even though small correction has been experiencing the last month, recovering the SP500 index, from 2200 to 2800 [that`s a 30% recovery from lows], the general feeling is that the market should correct even bigger. Go to 1800 or lower.

The high liquidity programs implemented from all countries will not be enough and will destroy many small and also big businesses (today there are news that some big companies will need help to pay salaries).

I don´t think this will be the end of the economy, because on 1929 the financial market blowed up (all people lost their savings). This is not the case today, but most probably many business will not recover from the down trend and therefore the final picture will be that fewer plants and production capacity will be available in the economy.

If we sum in this equation the huge stimulus implemented that most likely will increase the M3 money supply and if we combine with less production capacity. In my opinion we could end up in an era where there is a lot of money chasing fewer goods in circulation, thus INFLATION

And if inflation kicks on, the savings will be the most affected investments. Inflation normally increases stock market prices, and could say, that being in the stock market while inflation kicks in, could be the best option, because companies use to have better revenues, mainly due to inflation effect, and their stock price increases in similar percentage.

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