Month: August 2020

Dear Ladies and Gentlemen

Many thanks for all the inspiring and challenging messages I received to my last weekly mail. The topic “fear of inflation” indeed triggered a lot of comments, and I apologize for the somewhat delayed answering to some of them, as I was overwhelmed by the sheer number of emails I had received. Many thanks for your active participation!

A fair number of the mails I had received covered the question and interpretation of a definition of inflation. If I look at the concept of inflation, I am not so much concerned if inflation should be called inflation because a country’s monetary base is getting inflated (the “Austrian” view) or if prices of a basket containing all sorts of goods move up (the “Keynesian” view). These definitions (to some, they become almost religious in character) are superfluous for broad sections of the population and are usually depending on individual perspectives and defending one, or the other therefore is mostly an unnecessary loss of time. To me, the ultimate variable in the equation of inflation is the answer to how much money the average citizen (consumer) has in his pocket and what the purchasing power of that money is. Because this is what is relevant to the average person in the street.

Moreover, because I think that way, Ladies and Gentlemen, to me, the perception of inflation is a highly relative measure, depending on cultural backgrounds, socio-cultural backgrounds, age, country of citizenship, health status, and more. Let me elaborate.

The statistical inflation number per country is generally calculated with the help of a basket of goods – naturally that basket of goods changes (sometimes more sometimes less) from country to country, according to what the country’s economists think should belong in the basket and therefore be part of the inflation measure. The content of those baskets tends to change over time to adapt the shopping basket to changes in the shopping behaviour of a population. Some people would argue that because the content of the shopping basket changes, a long-term measure is complicated, and there are even people who claim, the changes in the shopping basket are executed only to replace products that go up in price a lot with products that show no to little price increase and thus serve to manipulate official inflation numbers.

Because I do not want to get into that discussion, and just for fun, I prefer to calculate my very own and individual inflation number by putting together my shopping basket with the ten products that are most relevant for our household and together cause the highest costs in our household budget. Thanks to Excel, this is quite an easy task. In my case, for example, housing has become cheaper over the last twenty years, because interest rates went down and as a consequence mortgage cost went down continuously as well, while for people who rent their house or apartment in most cases (a least in Switzerland) cost for housing has gone up. Again, the perception of inflation may change from country to country, but also from household to household.

One last thing I want to touch concerning inflation is the increase in some asset prices. Asset price inflation is real, and I firmly believe it will not stop as long as governments and central banks continue to pour liquidity into the economy. As a consequence, this will most probably lead to an even larger gap between asset owners and people who do not own such assets, and if now we want to somewhat philosophically speculate about further consequences, I think this has the potential to lead to some political unrest eventually.

I am looking forward to your comments!

Furthermore, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all, good health!

Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li
Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend.

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Dear Ladies and Gentlemen

I hope you all had an inspiring summer and were able to relax and decompress from what for many was a challenging first half of 2020.
I did enjoy a vacation in Switzerland, at home, working in the garden, reading, cooking (I started experimenting with vegan recipes) and playing golf. The weather in Switzerland was beautiful and not travelling for once during vacation time was o.k. However, I must admit that I missed at times the feeling of diving into a different cultural environment and I hope and am confident to enjoy this again in the not so distant future.

Now, today’s weekly, I would like to dedicate on the topic of inflation. It almost seems inflation is mentioned by the media, banks and in all sorts of publications in an “inflationary” manner. While there seems to be plenty of noise on the effects of inflation, the cause of it does not seem to receive the same attention. At times one may get the impression the cause of inflation is purposefully swiped under the carpet as not to dampen the fear caused by concentrating on the terrible effects of inflation.

Well, since this fear of inflation may lead to misallocation of capital, I felt this was an exciting topic to start with after vacation time.

Ladies and Gentlemen, in a very simplified way, inflation may arise in a few ways and is generally defined by a widespread and continuous increase in prices for products and services, resulting in a fall in the purchasing value of money.

Possible ways inflation begins with are expanding money supply together with increasing speed of money circulation, demand-pull inflation, and cost-push inflation. You may come across various other terms and definitions, but in essence, this is what inflation is all about, and of course, one may experience any combination of the ways just mentioned.

For the last decades, the monetary bases in all (but not only) advanced economies increased massively. The great financial crisis and now the Covid-19 pandemic were only the most recent and extreme examples, but even before and in between these crises, monetary bases in advanced economies grew steadily. Nevertheless, there was no spike in inflation. How is that possible you may ask? The reason for it may be found in the slow speed of money circulation. Even if the money was there, it was not used, spent rapidly enough to create inflationary pressure.

There was no demand-pull inflation either. (Demand-pull inflation arises when demand for goods and services exceeds the corresponding supply over a long period), nor was there any cost-push inflation. (Cost-push inflation arises with increasing production costs, primarily increases in personnel costs/incidental wage costs (wage-push inflation), energy and/or increasing prices of raw materials, or interest rate increases).

But why on earth do we read about all those potentially terrible effects of inflation, if over the last decades inflation was by no means excessive? I guess it is because of the fear of a sudden increase in the speed of money circulation. This indeed could trigger higher inflation.

The question is probably how likely this is going to happen, and in this respect, it probably makes sense to think in scenarios. If you believe in a scenario with a deep recession and increasing unemployment and continuous low-interest rates, the speed of money circulation will most probably not go up. If, however, you believe in a substantial economic recovery, full employment, prosperity for everyone, increasing interest rates, a de-saving effect may lead to an increase in the speed of money circulation and inflation may go up.

I still believe in such a scenario like in any other, central banks would in a coordinated manner, fight inflation as much as possible, trying to control the yield curve.

If you vaguely agree with one of my scenarios (and there are many more than the two simplified ones I just mentioned), I think you will agree that a scenario in which we are facing a recession with increasing unemployment and continuous low-interest rates nevertheless leading to higher inflation is hard to imagine, no?

I am looking forward to your comments!

Furthermore, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all, good health!

Please feel free to share your ideas and thoughts with me, but please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li
Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend.

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li