Outlook for inflation and commodities
The tipping point
Inflationary forces have the upper hand and we need to prepare for higher inflation in the long run. But the big difference from the last financial crisis is the actions of central banks and governments. Now that the central banks’ toolbox is empty, it is the government that is at the helm and taking charge of the economy. Here is also the big difference, while QE did lead to the expansion of the FED’s balance sheet, the money never reached the general population. Now, however, direct fiscal methods are used, where the newly created money quickly reaches the population at large. This leads to higher inflation. The time of the great moderation is over. Meanwhile, the first great narrative was that inflation was temporary. But this too turns out to be false. While the general population is now waking up to this problem of price increases, central banks are distinguishing themselves by how little they are doing about it.
What are the drivers of inflation?
The big debate is whether the current inflation is more comparable to the situation in the 1970s or the 1940s. While parallels can certainly be drawn with both, one of the big changes is China. China’s opening up and devaluation of its currency had a very deflationary effect. But now we are seeing a reversal in that trend. Meanwhile, central banks are in the zero interest rate trap. The solution, as mentioned earlier, is big projects of a fiscal nature, which act as a further driver of inflation.
Infrastructure for the future
The new commodity super-cycle is upon us. One of the big projects that should fuel it in the coming years are the big infrastructure projects. Both the US and Europe are planning to spend huge sums on new infrastructure. Europe is even going so far as to turn the tables and copy China. A new Silk Road project will both stimulate the economy and increase Europe’s influence. All these projects will require quantities of raw materials that are simply not available at the moment. This should provide the backbone for the bull market in commodities for the next few years. Commodities are also a very good inflation hedge and should be considered for that reason as well.
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