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      12-02-2021, 08:07 PM   #65
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Originally Posted by 2000cs View Post
Yesterday Fed Chair Powell officially removed “temporary” from the Fed’s description of inflation, noting that it will be here for a while and that the Fed will use its tools to battle it. Those tools are accelerating the taper and raising interest rates. The taper is likely to accelerate immediately, not clear yet when the first interest rate raise will be.

The Fed’s anticipated actions to throttle back inflation will also reduce growth, which itself was already challenged by supply problems (thus inflation). And effectively the Fed is using monetary policy to fight the fiscal stimulus coming out of Congress. So it seems we are in, or will shortly be in a period of stagflation. This is rising prices but low to no growth. This will last at least 6 months, likely more than a year. If the Fed is unsuccessful, we could either go into a recession or experience stagflation for multiple years.

So, in these scenarios, what are your thoughts on investment strategies to generate real returns?
First, just to share my aspect of the current economic situation - I would say that inflation is here mainly due to the actions taken by the Fed at the start of COVID, where they took unprecedented action to reduce reserve rates for lending (leading to low interest rates that fueled borrowing and purchasing real estate), setting very low reserve requirements for cash reserves held by commercial banks, and gov't stimulus packages - all which pumped a lot of money into the economy to prevent a sudden recession that would've occurred otherwise due to COVID.

So in essence, it created a false sense of profitability and normalcy due to increased volume of money in the economy (as measured by M0, M1, M2).

Consequently, due to the increases in money available, with the subsequent decreases in supply of goods (once again due to COVID causing supply chain disruptions), prices of goods increased due to increased demand. However, inflation also occurred in this situation due to the fact that people actually had money available to pay for the increased prices - and so on and so forth; more money circulating in the economy, inflation kicks in and the purchasing power of the dollar goes down.

The Fed obviously monitors this through the consumer price index which surveys how much a basket of goods an average American family household would buy + (takes into account gov't policies) and then enacts policy to control inflation. Normally speaking, inflation goals are around 2-3% a year. Current inflation rates are > 6%! You can bet the Fed is working to curb this rate at this time.

Recession is never a good thing, but I suspect at some point there will be an economic and market correction. An economy can't have less people working and producing less goods/services, and expect good times to keep rolling.

Rambling aside, to answer your question about investment strategies to hedge against inflation... well if you look at the current P/E ratios of the stock market, the market is extremely overvalued at this time (>2 std dev). Akin to what the market looked like prior to the dotcom burst. Will it burst like the dotcom era? Hope not, but can it sustain returns that we're seeing now indefinitely? History says no. Equities aside, I can't think of one good place to park your money without some form of wild speculation.

I think investing should come back down to principles that work no matter what times you're in - well diversified portfolio that is tax efficient, low-cost, low-turn over that is spread out between stocks, bonds, cash reserves, and possibly, real-estate. I would also emphasize staying the course for the long-term in the stock market, let time be your friend and give compound interest time to do its job. Good luck investing in these wild times.
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