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With the COVID pandemic and the following money printing by the global governments the amount of money in the world has risen over the past few months. In this article we will try to look at the consequence of rising amounts of money and how this could affect the markets. Keep in mind that this article is not financial advice but for entertainment only!
Inflation Explained
To start this article, we should quickly explain what inflation is? In general, people can see inflation happening when the normal goods that they are buying are starting to cost more. For example: You are used to buy an apple for 1$. With inflation happening this apple would be costing you 1.1$. This would be equal to a 10% inflation. This means that your money is losing value. While you could have gotten 110 apples for 110$ you now can only get 100 apples for the same 110$. Normally, inflation is calculated by selecting every day’s goods and putting them into one basket and comparing the prices over the years. This could be a big point of criticism because in this basket are no real estate or stock market shares included.
Is Inflation Coming?
The next question we should discuss is: Will there be an inflation or not? Since 2009 several experts and prophets are predicting that a higher-than-normal inflation rate is coming towards us. Even the word of hyperinflation is occurring more often. In reality the inflation rate over the years was barely hitting 5% and on average about 2-3%.
So why is the inflation fear so high? Firstly, in times where the fear is high, it is always possible to make good money. This is why I think that some people are trying to inflate this fear and take profits of the situation. Secondly, it seems like the inflation post-COVID is starting to pick up. Due to the government’s money printing the basket seems to get more expensive. The following graph also shows that the inflation is starting to rise in an unhealthy way.
So, is this an indicator to be fearful and overthink everything we know about investments and holding stocks and crypto?
Calculation of Inflation
To answer this question, we have to have a more detailed look at the calculations. Here, we can divide the process into two components. The first component is the “expected inflation”. This part is showing what investors and governments are expecting to be the inflation. On the other hand, we have the “unexpected inflation”. This is more or less a surprise component that takes into account events like COVID because nobody could have expected a pandemic to happen.
Staying with the expected inflation. It is possible to calculate this part of the equation. This being calculated by big institutions with the help of the bond market. Since I am no expert in this, I will stay away from it. To summarize the most important part of it: the inflation is already calculated in the bond prize that you are willing to buy. This rule can be applied to the stock market as well. Big investment houses like JP Morgan are constantly recalculating the value of stocks and evaluating the price of the stocks. This is why reports that are indicating a big inflation rate does not have too much impact on the stock market since the expected part of the inflation is already calculated in it. What is a little problematic is the unexpected part of the inflation. Nobody can calculate a big event to happen.
Influence on the Stock Market
So how will inflation influence the stock market? There are different ways to look at it. Firstly, some of the companies need to buy goods as well to produce their good. This means that if inflation is rising the supplied goods are getting more expensive as well. Another angle to look at it are the energy costs. With rising inflation, the cost of production is rising as well and therefore keeps the win margins of the companies low. This means that a certain sector on the market will be influenced badly. On the other side, the energy sector will be influenced in a good way because the companies can sell the same amount of energy for more money. Since companies are also able to sell their produced goods for a higher price to the customer to equalize the effects of inflation the real loser will still be the customer. This means that inflation has a certain effect on the stock market, but it is not even as close as many people and new investors are expecting.
Conclusion
To conclude this article the saying “cash is trash” could not be more true. In times like these money should be used as the thing that it was supposed to be used: as a way of trading and not as a store of value. The best way is to search for an investment that you believe in and that you can understand so you can hold this investment even in uncertain times like this. I think that the crypto market is definitely one of these investments.
Published by ga38jem on PUBLISH0X on 12th October 2021
Published by ga38jem on LeoFinance on 12th October 2021
