Sunday morning thoughts: inflation, recession and investment
This decade is highly uncertain. Either it will be violently volatile, followed by a deep recession or will be straight up a lost decade that started back in April 2021. Currently, I think the former is more likely.
High inflation and persistent 3-5% CPI will eat into savings and the value of fiat. It will trigger further rate hikes for a longer period. That will trigger a recession, even a depression. The only solution to high or persistent inflation is recession or depression.
Given the pain is not long enough, hence not painful enough yet, given that the Americans and Europeans are still living in Lalaland, the spirit of entitlement is still so high, and the habitual taken-for-granted demands for the government to solve their laziness and sorrow by printing money are still so strong, it is likely that at the first sign of recession, at the first sign of pain, the Fed will cave in quickly, and the ECB will cave in even faster. There will be trillions of dollars and euros printed, which will drive up the financial asset price through the roof very quickly.
This will cause another round of high inflation, which will trigger another round of more aggressive rate hikers. Volker 2.0 can only be born after the 2nd bout of high inflation. He can only be born when the governments and more than 50% of the residents are so hurt and fed up by inflation. No matter how intelligent JP is, no matter how determent and adamant he is now, no matter how much he can learn from history, no matter how much foresight he has now, the timing the wrong. He will be under too much political pressure to cave in from the inflation fight, because the pain is simply not long enough yet not deep enough yet, hence the political will is not yet enough for him to be Volker 2.0. He will either back down, or retire, or get sacked.
Things are not that bad right now. There is still too much dry powder lying around. Enough gains were made by a small percentage of the population during the 2020-2021 bull market. It doesn’t take all of their money to drive the market. Some of their money flew back to the market. The US has been selling their Strategic Petrol Reserves. The Treasury has been drowning down their TGA. China injected crazy liquidity in late 2022. The Fed injected hundreds of billions to save one bank at the first sign of crack during a weekend, wiping out 2/3 of the QT. Employment is holding up well. The ordinary population has been kept afloat with stimulus checks, tax rebates, payment moratoriums, and increased wages. Now the rate of increase is coming down a little, the vast majority of the population mistakenly believes inflation is going away, so they are not worried because why would they? They survived the 9%+ CPI, didn’t they? So they will be fine with a 6 handle, isn’t it? With all these, confidence is regaining due to most likely a lack of repeated episodes of pain.
The real market bottom is only after the repeated hopes ups and hopes crushes, repeated optimism and disappointments. Real despair can only be induced after repeated episodes of pain. That is the haul mark of a real market bottom. There is not enough time yet for the cycle to play out yet.
The final leg of the cycle will take years to play out. In the meantime, it is possible, probably or even likely that we will have a final run-up and blow-off top before the final showdown, which will be followed by a real lost decade.
Nobody knows what will happen, and how it will happen or when. What I am doing is not to bet on it. I use the existing dry powder to dca. It can easily last me till the end of 2023 and beyond. I will buy aggressively if it crashes within this year, which if it were to happen, would be more likely in Q3-Q4. In the meantime, I am saving all my newly earned money to buy the huge crash in 2024-2025 if it were to be postponed till then.
I only focus on one asset class, the one that will be benefited the most by money printing. It is coming, sooner or later. I have the luxury to wait. Per my current personal situation, it makes more sense to focus on this asset class than diversifying. I will diversify in the future when the timing makes more sense for me.
For my plan to play out, the most important thing for me is to hold on to my current job, accumulate experience and move on to a better paid job in the near future. I have the patience and luxury to wait for the fruit of my investment in the future, even if it would take a few years.
My exit point is the next blow off top. Either it may come in 2024-2025 or thereafter 2026-2027.
Then I will sit on either fiat or another form of store of value based on my assessment at that time. The dollar is at the most particular point in time during its life cycle. It is on its way to demise, the question is when. It has already been the global reserve currency for ~75 years. It may last another few years or a few decades. I can only wait and see.
Commodities and real estate will suffer during a recession and depression. Possibly fiat, digital or CBDC, might be just the best option still. Will see.
For now, I am sticking to my plan.
Steady dca and waiting are the rule of the game. 无为。