December 05, 2022

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Inflation & The Stock Market

First off, Happy Mother's Day to all the mothers who are my readers. I hope you all had a wonderful celebration over the weekend despite the MCO.

Moving on, quite a number of readers have asked about "hyper-inflation" for the past weeks. To address this, let me bring all through a short journey through history which was even before my time. In the late 1970s, inflation in US was sky rocketing with an inflation rate of 13% in 1979 followed by 13% again in 1980. This was attributed to President Nixon who ended the gold standard in 1973. The USD value plummeted on the foreign exchange markets. That made import prices higher, creating inflation. In economics it's called "imported inflation". Subsequent Fed Chairman and policy makers tried to rein in the inflation but did a bad job simply because consumers and companies tried to beat inflation by buying ahead of time (for fear the price will keep increasing). This made things worst.

Then Paul Volcker came into the picture. A steadfast Fed Chairman, one of the most independent minded policy maker, he raised interest rate significantly (8.5%) in 1 year to a high of 20%. Imagine, 20% interest rate. He did so with force and regardless of opposition to rein in the wild inflation in the growing economy. It succeeded to bring down inflation to a moderate level but the side effect was an 18 month long recession. Many industries were affected like housing (casualty of high mortgage interest rate), auto industry etc. However, by the time he left, the economy recovered and usher 20 years of strong economy for US including helping Ronald Reagan win election and build a strong presidential legacy throughout his tenure. This was called the "Volcker Shock". 

How is it relevant here? Well, inflation actually is good. Healthy inflation primarily is brought about by healthy economic growth. Usually it is a result of GDP expansion, wage growth. Now, in the current situation in the world, the so called inflation is actually unhealthy. It is not demand driven. In fact from my observation, it is primarily caused by

1. extreme monetary policy (printing of money) causing excess liquidity in the economy,

2. supply shortage (caused by Covid-19 shutdown, slow restart of factory, supply chain issues)

3. Uneven recovery in economies globally

So those who are propagating "hyper inflation", in my humble view, have not studied enough to understand the actual situation. Even I myself, is hesitant to comment on this topic as I feel I have yet to observe enough to understand. Do not get caught up with all these "gurus", pundits and sensationalism in the media. People talking about inflation is understandable. "Hyperinflation" is something else altogether. Hyperinflation is an inflation rate of 50% per month. It only happens during time of war, turmoil, great disaster. So whoever is using this term, clearly is not aware.

I believe in inflation but more so in US and countries which are recovering well from Covid-19. My view on the current inflation is "transitional". It is transitional because there is an adjustment between demand and supply which will balance out. This is also one of the reasons, I have been wary of thematic plays surrounding commodities. It is not sustainable in the long term and will stabilise eventually. It is ok for the near term but beyond that, I do not have ability to forecast.

Coming back to the week ahead, this is the last week prior Raya. Disappointing to all, there was no Raya rally. Additionally, our market continues to underperform sliding below 1600 to a low of 1570. I believe our local funds have very low confidence towards our own market and cannot decide what to do. Research houses' recovery play talk are all down the drain now that Covid-19, 4th wave is ravaging our country and regional countries. Earlier I did mention quite a number of times that those who were talking about recovery plays in tourism, airline and retail were too optimistic and counting the chicken before it hatch. Interestingly, I saw one research house last week downgrading AirAsia again after upgrading in early January, saying it is unlikely for it to return to profitability in 2021 due to Covid-19 resurgence and slower vaccination rollout plan.

In the mean time, I have been increasing my cash position. I may not be bullish on the markets but will selectively target certain stocks (not based on thematic or sectorial play.) I am also patiently waiting to collect blue chip names or arbitrage play for longer term hold. That in my view is the safest strategy in a volatile and uncertain market.

Best wishes,



For link to my new book - "Once Upon A Time In Bursa", please click HERE :

Tech Sector Bulletproof to Frothy Valuation?
Once Upon A Time in Bursa by Tradeview


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This  information should not and cannot be construed as or relied on and (for  all intents and purposes) does not constitute financial, investment or  any other form of advice. Any investment involves the taking of  substantial risks, including (but not limited to) complete loss of  capital. Every investor has different strategies, risk tolerances and  time frames. You are advised to perform your own independent checks,  research or study; and you should contact a licensed professional before  making any investment decisions.

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