Newsletter: The Released Balloon Theory of Inflation
A released balloon can be deflating but still go up and down in an unpredictable way before collapsing. Inflation is like that too. It can ease in the near term while going up in the long term before it reaches its final level. So be careful extrapolating recent trends.
Since this is my first live monthly newsletter, I thought I’d outline my approach. Please feel free to let me know if this format is not what you were expecting.
There are three sections. The first analyzes a timely topic and its implications for the market environment. The second contains analysis using the market climate model and its components. The third is a more in depth discussion of one or more of the market climate components, likely any that have changed during the last month. There will undoubtedly be interaction between the three sections. Again, if the format isn’t working for you, let me know either in the comments or by sending me an email.
Core Inflation: Slowing, but still too high
Right now the major topic is inflation. Particularly, where is it going. Most of my recent blogs have been about inflation. Not because I enjoy writing about inflation, but because it is the factor driving the economy, monetary policy and the markets. Until inflation is truly tamed, it will continue to drive market uncertainty. The Fractal Market Hypothesis states that high volatility occurs when the investment horizon of the market shrinks to a more uniform level. When the market as a whole has a short investment horizon reaction to market information is also largely in the same direction as trading is on one side or the other.