The printing of money by the central bank led to inflation. Does this sound right? But it's not that fast.
For US investors, the high inflation in the 1970s and the recession caused by the Federal Reserve in the early 1980s have not shown a recent cause deviation. We habitually believe that large-scale quantitative easing and low interest rates should trigger explosive price increases. However, the data is rolling in, indicating that we are heading towards deflation, despite the central bank buying $ 2.4 billion in financial assets per hour (according to Martin Baccardax on Wall Street).
I admit that when analyzing this situation, the benchmark interest rate is very important-that is, if the central banks (ie the Federal Reserve) do nothing, what will inflation look like? I think we will experience more deflation, but This is not to say that inflation will suddenly appear.
Over the past two months, we have written an overall bullish paper on energy and commodities, but we also recognize and respect data showing weak growth and low policy interest rates. It is difficult to see a large flow of funds again, which stimulates a sharp increase in consumer prices. To truly see the return of inflation, we need an increase in labor costs and a sharp increase in currency turnover.
Enter Google search trends. Searches for deflation and hyperinflation have both surged recently.
Our position is that there may be deflation in developed economies in the near future, and mid- and long-term inflation may rise, but continued deflation and sudden hyperinflation may be long-tail risks.
The first chart can be traced back to 2004, vividly showing the "non-representative" nature of the big financial crisis. Deflation has made headlines, so people are naturally curious about it. Then there was the massive quantitative easing and government intervention that led to rising fears of hyperinflation-recall how well crude oil and gold performed from late 2008 to mid-2011 (when people heard about "inflation")-large That's how they think when commodity prices rise). The term "inflation reinflation" is very common in financial TV shows.
This year, 70% of countries had negative producer price index (PPI) growth, and 30% of countries had negative consumer price index (CPI) growth. Oil certainly played a role, but easing capacity utilization also played a role.
What are the possible outcomes? Due to the economic weakness and slow recovery caused by the coronavirus disease in 2019, continued deflation is a risk. If you want, you can call it u-shaped, but the bottom line is that personal behavior will slowly return to normal, not quickly. In the near term, the global economic recovery from the end of 2020 to 2021 may bring some temporary upward pressure due to price rebound.
According to Bloomberg, in the short term, people may feel the impact of inflation more than the traditional period. This may also trigger some inflation concerns. According to reports, a basket of commodities purchased during the blockade was very different from what was usually purchased. This makes sense because people do n’t buy much gasoline or book airline tickets, but we all bought a ton of toilet paper. All consumer dollars are chasing the same goods.
The point is that both deflation and hyperinflation can occur, but in our view, both of these situations are long-tail risks. Short-term deflationary pressure is followed by higher inflation, rather than hyperinflation, which is a more reasonable and possible result.