Inflation: Making The Complex, Simple - Part 1

The quarterback signals for the Y receiver in the trips formation to shift left toward the right tackle. At the same time, the running back moves to the quarterback’s right. The slot Z receiver runs a fake jet sweep and doubles back. The left tackle and guard are ready to pull to the right, and the center will counter to the left. A safety creeps toward the line and the Sam yells to the strong-side linebacker to shadow the tight end.

The quarterback drops back and throws a pass up the middle for a 20 yard gain. What looks like a simple football play on television, is a complex choreography of 22 football players, coaches, and numerous strategies.

Humans constantly digest massive amounts of data. To make sense of our surroundings, we summarize data into simple packages. This survival skill is necessary, but it often results in a failure to appreciate life’s complexity.

Like a passing play, the price of a Big Mac may appear to be a simple number. However, the market forces determining its price are complex and often misunderstood. In fact, the most vital force has nothing to do with McDonald’s or its customers. It’s all about the supply and demand for money.

Upon reading this article, and its conclusion in a week, you will understand what drives inflation. Whether we are approaching an inflationary or deflationary environment, being a step ahead of the market's thinking is critical to investment success.

Part Two of this article will continue on the same themes as this article. The best-returning trades are those occurring when the market is proven wrong and offsides. In Part Three, we will share some market-based inflation measures to understand the market’s inflation view.

 

Who Remembers the ’70s?

Ask any investment professional what it was like to manage money in an inflationary environment, and you are likely to get a blank stare. The reason is an investment professional that worked through a period of high inflation in the U.S. is at least 65 years old. As such, experience managing wealth in such a volatile environment is hard to come by. The lack of real inflation era experience may increase price volatility if such an environment emerges. Accordingly, a trying investment environment will be even more challenging to navigate.

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