We had written in March about inflation creeping into the economy. It is now clearly visible in the data, as well as anecdotally.
The Federal Reserve Chair is now considering the possibility that inflation may stick around for a while.
Companies are seeing their input costs rise. While top lines may look good, margins are, and will continue to be, squeezed as long as inflation stays high. Only companies with the strongest pricing power will maintain margins.
If inflation stays high, countries around the world will raise interest rates. If they’ve already begun, the process might accelerate.
Rising interest rates will tighten liquidity conditions. And tight liquidity conditions would be detrimental to all assets, but particularly to those that are currently inflated beyond reason.
It’s a time to be cautious about assets that have no semblance of real-world or main-street backing for their valuations.