Talk of Inflation and a Stock Market Bubble gain traction


Is inflation becoming the real test of market durability in 2021?

Inflation, during these times, is an unknown quantity, even an unspoken term from times past, something to talk about . But it may soon make a fresh appearance in world economies, and when it does, the fledgling world economic recovery will likely suffer again, despite all of the financial support ploughed into the ‘system’. The pressure on interest rates to rise again will increase. Something has to go pop!

Central banks

Our current batch of Central bankers pretty much have not witnessed or dealt with inflation and the problems it likely will introduce, at least since the financial crisis of 2008/2009. Their remit has primarily been to cut and ease. Easy!

This situation will call for a whole new era of banking governance and skills set to come to the fore as we bounce from easy money flow into inflationary pressure and bond yield increases.

Aggressive policies

Low interest rates, aggressive fiscal policy and unrelenting stimulus measures have helped to hold the worst of the Coronavirus pandemic at bay and allowed the economy to breathe a little. But the level of borrowing and debt is massive, utterly astronomical and all of this ‘easy’ money has artificially inflated the stock market placing the stock market and the real economy, (where this money was truly needed), completely out of whack! Has the economy truly benefited from the unparalleled levels of stimulus forced into the financial system? I know the stock market has!

What to do with my money

What do you do with your money when interest rates are so low and other options are unavailable? Much money has moved into the stock market and as long as Central bankers continue to pump money into the ‘system’ enforcing the now well heeded message, ‘that the financial system must not fail’, stocks will continue their unrelenting upward trend. That is until something breaks. Inflation and higher bond yields just might be that breaking point.

Inflationary pressures

Inflation pressure will likely cause Central banks (the Fed in particular) to stubbornly hold even as inflation exceeds its 2% target. Our bank leaders will most likely wait until the economy and jobs market are strong again before hiking.

But if inflation shoots higher – I think we will have a perfect mix of supply and demand effects to create inflation in 2021– then Central banks may need to act. The Bank of England recently noted that spare capacity in the economy will be eliminated this year.  This would lead to inflation at the kind of levels that worry policymakers.

Supply and demand

With inflation you have supply demand and cost demand forces at work. Commodities have recently seen price increases and raw material shortages. You may have noted the latest manufacturing PMI’s indicating this. Businesses will have no option other than to increase their prices.

Inflationary pressure will continue to increase and if bond yields continue to rise, we will see the perfect storm that may unravel these exceptionally and arguably artificially high stock valuations.

There is room to fall, it’s just how far?

The Dow, S&P 500 and Nasdaq have all recently hit all time highs!

Greed is also bad for your financial health.

Interest rates will have to be increased.

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