Short Term Trading Weekend Lounge: 9 - 11 July, page-58

Hi Gunslinger27

So many factors to consider.

To declare myself... I am decidedly in the inflation camp.

I had a quick look at Cathy Wood's arguments and I have a couple of quibbles. Much of her reasoning revolves around the continued impact of technology to drive deflation, in particular EVs. I think that is too narrow a perspective.

Although technology has been a deflationary force the more significant element has been globalisation and the way labour costs were systematically driven down, in tandem with undermining the political power of wage earners. Globalisation (and technology) created efficiencies but also brought with it an ever increasing wealth divide... stuff became cheaper but the poor became poorer (and QE made that worse).

The great power rivalry which has sprung up between the US and China is resulting in a duplication of supply chains... this is inherently expensive and counter to the long standing deflationary trend. Secondly, the EV revolution is commodity supply constrained meaning it will hit a stall point, it is physically impossible for it to achieve the projected growth targets.

Currently, it seems, the Fed has found a way to shrink the money supply (or at the least contain its growth rate) by returning assets through the reverse repo market. However, the US is on the cusp of needing to issue record levels of treasuries to finance record deficit spending so the retreat in money supply is likely a temporary thing since the Fed is almost certainly going to be the main buyer.

I might be wrong but the way I settled on looking at this is the crucial aspect in deciding whether it is inflation or not is to examine the rate of money creation compared to the growth of the economy. In the case of the US, in particular, money will be created at a faster rate than the economy will grow.... imo. That implies less real support for the value of the $US which equals inflation. How great that difference is will determine how high the inflation rate becomes... imo. (There is also the effect of the rivalry between China and the US and how that might diminish the international demand for $US's over time to consider)

Bond rates falling and the $US rising recently is consistent with a deflationary explanation in which case, if that remains so, it will prove Cathy Wood correct. I can't come up with a counter explanation and I am mystified why we are seeing it. The big picture as I see it is the US has an unserviceable debt with default or inflation the only choices remaining. Deflation is not an acceptable option and I believe every measure will be employed to prevent it.