When will inflation come down?

Find out where the markets are likely heading? When will inflation come down? The root cause as to why mortgages rates are exploding and why house prices are going to fall?

The catalyst to the global market turmoil is a shortage of US Dollar, the US Fed continue to take dollars out the system to get inflation under control, causing the USD to rise.

A rising USD exports deflation to countries which produce finished goods, such as cars, TVs, computer chips etc, so we have seen huge currency declines in Japan, Germany, China, South Korea, and Taiwan. The US are quietly enjoying this as they are exerting power on the world stage but at the same time strangling the financial system. Does “Money make the world go round” not until quantitative tightening stops, however once the Fed realises, they have baked the cake too long which could happen at any time, tightening will cease and growth returns.

How long will we have high inflation?

Is inflation going to remain in double digits forever? No. Are we going to see people hungry on the streets? No, why not? The Government will lose votes so they will do everything possible to make sure the vote cancelling issues are addressed, and we have seen some attempts to fix the voter’s pain in the UK with gas prices capped. Once anger, resentment and fear are addressed there will be optimism. So, inflation could be under control as soon as March 2023 and markets price this in anything up to 6 months prior, so is now a good time to increase risk? The US mid-terms are in November and the current UK Government has a mountain to climb before the next general election, remember optimism needs to be restored a long time before voting day.

The match is fixed.

Politicians are the ones that set policy, sometimes not warmly received as we witnessed a few weeks ago in the UK. When politicians decide, growth has gone too far or growth is required, we see quantitative easing or tightening, direct handouts to alleviate pain to keep the voters onside, anything to swing the game in their favour. We all know swinging the game in your favour affects the result.

Where will the markets go?

Are we going to see significant new market lows, not likely, but can the markets go lower before breaking back higher again. Possibly, yes? especially with the number of ongoing conflicts, after all we are in a bear market and unlike a favourable bull market a bear market’s path is difficult to predict.

The trick is to be invested at or near the bottom of a correction.There are so many investors who wait for confirmation, and what is confirmation? yes, spot on, the markets going up, by the time most investors enter the markets they have missed significant gains.

Bullish or Bearish?

It is the worst sentiment in any measure of any survey in history, people are record bearish and terrified because of what has been going on in the world, one thing after another after another. This surprisingly as an investor is good news. A positive is that bullish sentiment increased 3.9% in the past week, 6.2% higher than all-time lows a few weeks ago.

The bond markets and USD are temporarily detached from the entire system. Do you believe the government will have any voters left if mortgage rates remain high for long, inflation continues to sore, unemployment starts to climb. It will not be long before someone will come to the rescue, perhaps, changing the reserve requirements for the banks will oil the cogs and get things moving?

Government narrative soon to change.

So, what will the Government do once unemployment starts to climb? You guessed it, inflation is now under control, we need to help you get your mortgage rates down. How long can a homeowner continue paying such high interest rates, blah, blah, blah, we need growth! Unfortunately the UK Government got this slightly wrong, inflation need to be under control before shouting for growth.

Where are markets now?

Markets are down 30% or greater since the start of the year. When US inflation remained high in the eighties, markets only dropped 27%, pre-World War II only down 20%.

The Fed remain firm for now that they are going to raise interest rates further, perhaps greater than the market can deal while continuing with quantitative tightening. The Bank of England indicated quantitative tightening to control the reckless mini budget.

This quantitative tightening and the requirement for banks to hold reserves has added increased pressure on the bond market starving it of liquidity and pushing bond volatility higher than equity markets, which is not normal, something must give and give soon.

Future growth is near.

Greening of the planet by 2030, Robotics, Electric Vehicles, 5G & 6G, Genetic sciences, all coming together at the same time at the fastest pace of change humanity has known.

The moment quantitative tightening slows or comes to a stop, then market growth will explode. We are already seeing signs of reversals that we only ever see after massive sell offs.

Marcos and technical analysis show we are close to a recovery and the USD is showing signs of weakening, without the covid stimulus, inflation should be nearer to 1% so perhaps in a few weeks or months markets will be heading up.

However, if markets continue their downward cycle, we will adjust portfolios accordingly and have alternative investments ready to go at a moment’s notice. Remember a portfolio is only as good as the day it was built; ongoing management is imperative for optimum investment performance so that a portfolio achieves its long-term objectives.

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