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(Must Read) The Absolute Return Letter – March 2018- An Inflationary Bust Or …? – Link here

Here the key pointers that I picked up from the letter

FED is behind the curve
Whole Street was of the impression that inflation would remain steady, however Trumps recent tax proposal has lead companies to do wage revision, meaning inflation would rise probably with a lag. Suddenly, it would seem FED is behind the curve on inflation and interest rate hike.

Great Depression or High Inflation – choice is clear
Author believes we have not really come out of 2008 financial crisis, especially given we are in highly indebted economy. Going by history, there are 2 ways out – first, default (happened in 1930s, the great depression) and second, high inflation (Vietnam war & 2 oil crisis during 1966-81). It doesn’t look central bankers would like repeat of The Great Depression, hence the way out is high inflation.

Boiling Frog syndrome
When US announced it’s CPI on 13-Feb ahead of street expectation, pre-market trading suggested huge decline in indices, however market gave positive returns. Investor didn’t seem to heed inflation is on upward trajectory. It took long time for investors to get to use to low growth low inflation phase and same would be for this one “high inflation”. Markets might take a while to adjust to high inflation scenario.

First Inflation, then Deflation
Why would central bankers prefer high inflation, higher inflation is relative to interest rate, it will help destroy/reduce more debt. Over a period of time hawkish FED and repatriation of USD, would create stronger dollar in turn tighten dollar liquidity leading to deflation. So we move towards high inflation and then towards deflation, anybody’s guess on timeline and how long each lasts.

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