It is all over social media these days about the inflation narrative on why you should be heavily invested in the financial market or Fed printing will kill your wealth.
The Inflation Narrative
1) Too much Money is printed
2) Asset price will sky rocket for sure
3) Cash is trash
4) Time in the market beat timing in the market
Well I think there are several issues to consider before you empty your bank account and buy Tesla Stocks.
While I think the long term thesis of inflation and asset price going up is correct there are much more nuisances into this, before you rush to take a huge gamble on Tesla Stock to “protect from inflation”.
1) Very few people I know of are heavily weighted in cash from a net-worth perspective. Having a few years of emergency fund is nothing compared to the house on mortgage or compulsory retirement scheme mandated by the government. It seems that the inflation narrative is pushing everyone to see their money in bank as some forms of sin
2) Inflation has not been as bad as what many think. We all know that the 2 percent inflation government number is a joke. But in all seriousness your cash is not turning into thrash anytime soon for two reason.
-Technological improvement. Good phones and gadget are getting cheaper when you factor in quality.
-There is an overcapacity issue globally for low to mid end manufactured goods or basic material needs. if you are not too fussy about using branded goods or eating the best food there is hardly any price increase for everyday item in your mall or super market. Globally there are massive inventories of stationaries, clothes and grains that have no customers to consume.
-QE induced supply glut. Money printing can be deflationary too. When shale gas companies get easy money and can continue to operate at loss oil price will remain cheap. When private equity get access to easy money to produce the next uber our taxi fares just get cheaper.
I do think that inflation has mainly occurred on the service side when you need to hire someone to fix your leaking pipe at home or paying for tuition fee for your kids. We havn’t seen technological forces pushing the price down even though it could be in the future.
3) Not all assets will run equally in the each cycle. In the decade of 2010-2020 if you didnt bet on US Tech stocks you actually missed much of the US stocks gain. If you betted on commodities (which was the most common sense answer against inflation) you actually performed very badly compared to putting cash in the fixed deposit. No one knows what will pump in the next decade.
4) Money Printing does not mean market cannot crash very badly for a period of time
Most people visualize this way. QE means freshly minted papers handed out to people. Because there is a limited supply of financial assets and the continuous in-flood of money will surely push price higher.
There are much more nuisances about QE.
QE is not literally “handing money to people to buy investment assets”. It is the Fed buying assets to prop up asset market prices, usually in a crisis to prevent the downward spiraling forces of asset prices.
These days financial institutions are very over leveraged with derivates. They can and actually do hold assets (mainly liquid securities) that are way above their net assets. This means when sheet hits the fan they get margin called just like retail players.
So when Fed intervened and prop up asset prices . Money enter the system and the Fed hold the assets in their book. But the financial institutions/ investment parties on average remain over leveraged. The money comes in the form of extra buying power. If your portfolio net asset value (before QE) used to be worth 80 million and you can buy up to 160 million, and you were holding 140 million worth of assets (on the verge of margin call, and now after qe your net asset is worth 120 million, you are holding 210 worth of assets and you can buy up to 240. The first thing you want to do is not to use up the remaining extra buying power (which increased from 20 to 30). This is assuming one dollar of nav give you two dollar of buying power.
You can see that after the initial QE boost on price level investors didn’t get much of the dry powder to continue to push price higher, given how over leveraged they are. When you have rumors about rate hike or any negative event things can south very quickly.
Thats why you hear about “liquidity drying up” as an explanation on why prices capitulated when asset prices fell. You means we had years of QE and still liquidity can dry up? Yes it can for reasons explained above.
The Inflation Narrative
1) Too much Money is printed
2) Asset price will sky rocket for sure
3) Cash is trash
4) Time in the market beat timing in the market
Well I think there are several issues to consider before you empty your bank account and buy Tesla Stocks.
While I think the long term thesis of inflation and asset price going up is correct there are much more nuisances into this, before you rush to take a huge gamble on Tesla Stock to “protect from inflation”.
1) Very few people I know of are heavily weighted in cash from a net-worth perspective. Having a few years of emergency fund is nothing compared to the house on mortgage or compulsory retirement scheme mandated by the government. It seems that the inflation narrative is pushing everyone to see their money in bank as some forms of sin
2) Inflation has not been as bad as what many think. We all know that the 2 percent inflation government number is a joke. But in all seriousness your cash is not turning into thrash anytime soon for two reason.
-Technological improvement. Good phones and gadget are getting cheaper when you factor in quality.
-There is an overcapacity issue globally for low to mid end manufactured goods or basic material needs. if you are not too fussy about using branded goods or eating the best food there is hardly any price increase for everyday item in your mall or super market. Globally there are massive inventories of stationaries, clothes and grains that have no customers to consume.
-QE induced supply glut. Money printing can be deflationary too. When shale gas companies get easy money and can continue to operate at loss oil price will remain cheap. When private equity get access to easy money to produce the next uber our taxi fares just get cheaper.
I do think that inflation has mainly occurred on the service side when you need to hire someone to fix your leaking pipe at home or paying for tuition fee for your kids. We havn’t seen technological forces pushing the price down even though it could be in the future.
3) Not all assets will run equally in the each cycle. In the decade of 2010-2020 if you didnt bet on US Tech stocks you actually missed much of the US stocks gain. If you betted on commodities (which was the most common sense answer against inflation) you actually performed very badly compared to putting cash in the fixed deposit. No one knows what will pump in the next decade.
4) Money Printing does not mean market cannot crash very badly for a period of time
Most people visualize this way. QE means freshly minted papers handed out to people. Because there is a limited supply of financial assets and the continuous in-flood of money will surely push price higher.
There are much more nuisances about QE.
QE is not literally “handing money to people to buy investment assets”. It is the Fed buying assets to prop up asset market prices, usually in a crisis to prevent the downward spiraling forces of asset prices.
These days financial institutions are very over leveraged with derivates. They can and actually do hold assets (mainly liquid securities) that are way above their net assets. This means when sheet hits the fan they get margin called just like retail players.
So when Fed intervened and prop up asset prices . Money enter the system and the Fed hold the assets in their book. But the financial institutions/ investment parties on average remain over leveraged. The money comes in the form of extra buying power. If your portfolio net asset value (before QE) used to be worth 80 million and you can buy up to 160 million, and you were holding 140 million worth of assets (on the verge of margin call, and now after qe your net asset is worth 120 million, you are holding 210 worth of assets and you can buy up to 240. The first thing you want to do is not to use up the remaining extra buying power (which increased from 20 to 30). This is assuming one dollar of nav give you two dollar of buying power.
You can see that after the initial QE boost on price level investors didn’t get much of the dry powder to continue to push price higher, given how over leveraged they are. When you have rumors about rate hike or any negative event things can south very quickly.
Thats why you hear about “liquidity drying up” as an explanation on why prices capitulated when asset prices fell. You means we had years of QE and still liquidity can dry up? Yes it can for reasons explained above.
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