Recent weeks and months have been tumultuous in the stock market, and if you listen to market commentary, you will see one word come up over and over: inflation.
The funny thing is, market commentators cannot seem to decide whether we have too much or not enough. Many commodities started dropping a few months ago, driven by fears that inflationary prices would lead to a recession. When it looked like inflation was starting to level off, the same commodities dropped more. And then the Federal Reserve said it was satisfied with the way inflation was leveling off. Investors started worrying that the Fed was too complacent about the possibility of further inflation.
So guess what happened? Commodities dropped further still.
The moral of the story seems to be that the markets will do what they want in the short run and that market commentators will find excuses for it.
But we do believe that inflation will have a noticeable impact in the long run, and this poses many risks and opportunities for all of us.
With all the government stimulus money floating around, it might seem like inflation is inevitable. But the supply of money is only one side of the equation: money’s value depends on the supply of money versus the supply of all the things we want to spend it on.
For now the supply of money is up (due to the stimulus), and the supply of stuff we want is down (due largely to last year’s shutdowns and disruptions). The government’s hope is that as the next normal arrives, the supply of stuff will catch up to the supply of money—and inflation will settle back down.
Maybe that happens, maybe not. But we are less interested in what inflation does in the next year or two than we are in what it does in the decades ahead.
Everyone wants to build a bigger, brighter future. We are seeing an unprecedented demand for raw materials to make that happen, on top of the equipment and expertise to transform those materials into useful products. Whether we have a little inflation or a lot of inflation, this position strikes us as a good time to be in business for the companies producing raw materials and the ones manufacturing finished goods from them.
We do not know with certainty when or if this will play out. It may take years or decades. Even then, it may not come to pass the way we’re imagining.
But we think these big-picture trends will be more important in the long term than what the Fed announces this week or the next.
Clients, would you like to talk about this or anything else? Write or call.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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