Categories: Family Office, Financial NewsPublished On: August 31st, 2021Comments Off on Market Update – 8/27/202121.2 min read
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Recently, the trending topic has been: “the Fed’s crazy money printing will lead to serious inflation in the future.” However, the current price increases that everyone feels are not necessarily related to the Fed and central banks’ money printing.
The impact of the epidemic on the supply chain is the main driving force of recent price increases. The reasoning behind inflation determines whether it will be short-term or long-term.
Although the central banks of several countries are crazy about printing money, the decline in the velocity of money in the market has offset their impact.
Take the M2 money supply as an example. During the epidemic, M2 increased rapidly from $15.5 trillion to $20.5 trillion. It feels as though money is no different from wastepaper. However, increased money printing actually means that the Federal Reserve is giving money to banks. If the banks do not put the money in real economic activities, the velocity rate of money in the market will plummet, which will offset the impact of money printing. This is what has happened since 2000.
The ongoing price hikes are mostly caused by the epidemic, which is short-term. As long as the epidemic can be brought under control, price increases may only be short-term. For example, the resumption of operations in Ningbo, China, the world’s third largest trading port, will give everyone hope that supply chain restrictions will be eased.
Long-term inflation may still be a possibility, but the current loose monetary policy mainly affects “financial assets” rather than everyday goods. The worrying factor for the Korean central bank (the first central bank to raise interest rates in Asia) is financial asset bubbles, not inflation.
The possibility of inflation and deflation should both be considered simultaneously under asset allocation. Gold and real estate should not be overly concentrated, as they don’t perform as well during periods of deflation as they do during inflation. Financial assets that benefit from deflation, such as bonds, should also be appropriately allocated.
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