Has Inflation Peaked?

August 9, 2022

Looking at the uptrending stock market the past 6 weeks, one would think that with two, or three interest rates hikes, the Federal Reserve has put the recent inflation concerns to rest. We will shortly get a new inflaton reading and maybe the Wall Street Bulls will use it spin a positive economic picture. With a restained inflation reading we will be told that the Fed can go back to it money printing ways. And maybe even start talking about cutting interest rates early next year, if the economy starts to show signs of slowing.

Personally, I believe there is a lot of wishful thinking and that the main driving inflationary force is Government Deficits. Also, I see little political incentive to deal with that reality by both cutting spending, and increasing taxes, in the years ahead.

Labor costs have been held in check, the past 20 years, by the decline in union membership, the growth of offshore manufacturing in low labor cost countries of China, India, and Mexico, and the influx of cheap labor from across the border, seeking some degree of political stability.

I could be wrong, but I think inflation is a serious long term problem, for the World and our Country, and will not be vanquished with a few interest rate hikes by the Federal Reserve.

Also, I have noticed that the recent stock market rally has been fueled with several speculative stocks. For example, Kathy Wood’s ETF which has the symbol ARKK has increased from $30 to $50 in five weeks . Some Hong Kong based IPO’s have increased 50 fold in value, without any underlining earnings or prospects, the past few days. A sign of a market top?

Following the recent six week stock market rally has been an equally impressive rally in Bitcoin, reaching a high of $24,000. Is it on the way to $30,000, or could it again test the recent support level of $20,000 per coin? I don’t know, but don’t understand the “value” argument for these coins, and I do not consider them electronic gold. I am not the only one who thinks Microstrategy (MSTR) has made a risky bet putting its spare cash in Bitcoin, instead of Treasury Bills. One thing if it was with cash, another thing if it is with borrowed money. (See my previous post on the subject)

Although strong consumer spending news could propel the market higher, I am wondering how the collapse of China’s property market, and sharply falling gross output from 6% per year to even less than 4% this year will dampen investor expectations.

Add to that is the fact that both Russia and China are rewriting their business rules & laws day by day. For outside investors both Communist countries have become “Hotel California” money sinks; you can put money in, but you cannot take it out!

As Warren Buffett has said: “You Don’t Know Who is Swimming Naked, Until the Tide Goes Out.”