Every day, we get questions from investors who want to know what’s driving inflation. First, it was Federal Reserve Policy, then government fiscal stimulus, subsequent supply disruptions from Covid and Putin’s war and sanctions.
One thing is for sure — a wage-price spiral is not transitory. It is entrenched and will take years to eradicate. The markets are reacting to this reality, and it’s not pretty. The Fed must slow consumption demands, which will inevitably slow the economy and cause a recession. Yes stocks have been egregiously overvalued, driven by the policies intended to drive a wealth effect. And yes, the most overvalued “tech stocks” are already in a bust cycle. This is the feedstock for a classic brutal bear market similar to the Dot.com bear market of the early 2000s and the Financial Crisis Bear Market of 2008-2009.
What is driving inflation?
Eventually, the Fed will slow inflation and do an about-face moving from a monetary policy tightening cycle back to accommodation. I’d be willing to bet we will see zero-interest-policy-something in the not too distant future.
