ShortNote7-31

A brief comment on inflation. The cause of inflation is explained in (Understand Inflation 2022 https://jiahan1.wixsite.com/my-site-2/post/understand-inflation-2022). Generally speaking, 2-3% inflation is preferred for a good economy since it gives economic entities (including families, corporations, and governments) certainties. Zero or negative inflation can be destructive to economies. On the other extreme, high inflation is bad, in fact, very bad. When inflation is entrenched, it is very hard to reduce it to the preferred 2-3% range. Both Niall Ferguson and John Cochran commented that it is hard to forecast the end of high inflation. Niall Ferguson views economics from a historical perspective supplemented with his insight. John Cochran is an economist and a Hoover senior fellow. (A senior fellow implies that he has done something significant although I am not familiar with his work.) Cochran also said no one knows how long inflation will subside.

Larry Summers analyzed recent economic data and considered the recent news conference by Fed chairman J Powell. He thought that the Fed was too optimistic. I agree with him on this point. So it is likely that some pains could lie ahead. Niall Ferguson’s earlier op-ed said that J Powell may buckle under political pressure not raising rates high enough. We will see. I think Tom Lee and Jim Cramer are too optimistic about the market.

I am working on an economic model. In my view, the two most recent downturns (the pandemic and the current downturn) have benefited from fast communication and quick companies’ decision making. However, this does not remove all the risks of the market. One is that the last mile of inflation reduction is hard to achieve. Think of tens of millions of economic entities and the causes of inflation. For more than 10 years (since the GFC) most advanced economies enjoyed close to zero interest rates. It takes time and some pains to readjust. These may cause a future market selloff, perhaps only one. This optimistic view assumes no major geopolitical events, such as a military conflict involving Taiwan or Ukraine War gone bad. Also China’s economy should be closely observed. Both the property market and unemployment due to Covid may cause trouble. Another problem is the food crisis in poor countries. But these are hard to predict. If there are no shocks, sometime by the middle of Aug. or Sept would be OK to consider long term investment. This does not apply to individual stocks or industries.