Distortions, Inflation, Recession

On today’s show we’re talking market distortions, inflation, and the coming recession. The headwaters of a recession can be found in a cycle of inventory hoarding. So on today’s show we’re going to look and see if the conditions exist for inventory hoarding or not.

On March 7 we talked about derivative markets and the impact that they can have on the real value of the underlying assets.

We talked about futures markets and how these paper derivatives can be very helpful for those who have a vested interest in commodities prices to hedge against changes in commodities prices.

After all, business leaders, just like investors, want to bring predictability and certainty to their business.

In a world where currency is being devalued, it makes sense to put money into hard assets. If you’re in business, then buying inventory with today’s dollars makes sense before prices rise. The commodity will be a better store of value than the cash.

If you are in construction, and you have seen a nearly 25% increase in the price of paint in the past year, then stocking up on paint that you will use anyway seems like a good move. You doubt the price of paint will fall, so why not buy an entire year worth of supply? How about two years of supply? If you can borrow funds for your inventory at less than the expected price increase, buying now makes sense. If you are relying on nickel, then it makes sense to hedge futures and build inventory in nickel at prices you can handle. If you need lumber, then buy lumber as much lumber at prices you can tolerate as possible.

But when the market demand peaks, and consumers no longer see the need to build inventory, they will start consuming inventory rather buying from the supply chain. At that moment, demand drops like a stone, and prices fall dramatically. This dramatic swing in demand will trigger the next recession, which will be wider, deeper and longer than anyone expects. We need to be careful during this next period to know the difference between true market demand and shadow inventory in the hands of end customers.

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Host: Victor Menasce

email: podcast@victorjm.com