"I am a Christian. That
obliges me to be a Communist."
—George Bernard Shaw (Irish,
1856-1950)
Word for the day
Horsefeathers (n)
Something not worth
considering or bothering
Malice towards none
As Buddhist people say
"Right now, it's like this!"
First random thought this morning
I travelled to Uttrakhand hills through Western UP plains for
10days. Talking to people on the way, I noticed three things:
1. It's just 14months, and
the pain of demonetization has mostly faded from people's memory, regardless of
how hard opposition parties and a section of media is trying to keep the issue
alive till next election.
2. There no palpable rise
in strife between Hindu and Muslim communities. Their relation is as tense, or
as easy if you like, as they were prior to BJP forming governments in both the
states.
3. The standing Rabi crop
looks very good in both the states.
Inflation may return to haunt markets
Many readers have sought clarifications on my outlook and strategy
for 2018 outlined in an earlier post (see
here). I shall be answering most of these queries through my subsequent
posts.
A large number of queries arise from the recent sharp rally in
stock prices of commodity, especially metals, companies' stock prices. People
seem concerned about the sustainability of the stock rally and the overall
inflation outlook.
My view on commodity prices and inflation can be stated in very
simple terms as follows:
Since the last global financial crisis (GFC), the world has not
witnessed any instance of damaging inflation. Most developed countries and
their central bankers, most notably Fed, ECB and BoJ, have unsuccessfully
struggled to create reasonable inflation of 2% for all these years. Some emerging
markets have witnessed intermittent bouts of inflation. But most of these
episodes were due to temporary or seasonal supply shocks rather than due to a
trend.
The situation has been quite paradoxical in many ways. A
overwhelmingly large number of economists and analysts had anticipated
hyperinflationary conditions to emerge after central bankers took to the
unconventional path to the monetary policy management. Unprecedented printing
of fresh money (quantitative easing) should have normally fueled inflation
higher. But that has not happened. The primary reason for this could be very
low velocity of money, that may have prevented extra money to result in higher
money supply.
The commodity prices collapsed to multi decade lows. Gold prices
have remained subdued. And the feared currency war did not happen. Bond prices
rose to ridiculous levels, even the issuance by the troubled economies of
peripheral Europe.
The things have however changed since the process of policy
normalization has begun last year, led by US Fed. In 2018 both ECB and BoJ also
expected to begin the normalization process.
Commodity prices have gained significantly in past year or so,
driven by-
(a) Growth recovery in
developed economies;
(b) Capacity shut down
due to unviability or environmental concerns;
(c) Oil production
curtailment by OPEC and its allies;
(d) Poor investment in
capacity addition.
If the current conditions sustain, there is a strong likelihood that still
strong global liquidity may fuel money supply as the velocity of money rises on
growth pick up. This in conjunction with curtailed supplies shall lead to the
hyperinflationary conditions that most economists have been waiting for since
2009!...to continue tomorrow
No comments:
Post a Comment