Contrarian view on Inflation

Inflation in India touched 13 year high and even government reports suggest that there will not be any sign for de-acceleration in next three month.


Here is a contrarian view on high inflation -

Increase in commodity prices or inflation is good. Japan is struggling with deflation from more than 10 years, inflation is good for us (it helps some set of people making good profit), more the inflation it is much better (money power shift will be faster). Look at it as the shift of economic power or money flowing from commodity consuming to commodity producing countries.

Let us take an example, Petrol prices has gone up, so we will start controlling our expenses, is it not good? In case if we pay more to petrol producer then he/she will make good money and ultimately that money will come back to economy. It is like zero sum game, we lose they gain and when they lose we gain. So, just be happy and start investing.

Indian stock markets during last 5 years were in Bull Run not due to MF or domestic investors but due to FII. Who are these guys? They are from far west countries like US/UK etc. So, if oil is boiling what it means, Oil producing country will become reach and sooner or later they will deploy their profits where they can get better return. Hence money will come back to India/China or country with high GDP growth.

Any engine which is running fast need to take a pause or slow down before it moves further. And it is better that our markets are cooling down so that we can move further.

Even if we take a conservative $100 as the average price for crude oil, we are talking of $2 trillion worth of foreign exchange reserves being generated this year for oil producing countries. A maximum 10 per cent of this can be invested in the local economies, if they have to achieve a GDP growth rate of 10 per cent without over-heating their respective economies.

This means that $1.8 trillion worth of additional liquidity is expected to be generated in the world over the next year or so. By all estimates, whatever the losses of US sub-prime mess (which some say will be in the neighborhood of $3 to 4.5 billion — equivalent to about three months of oil selling), the incremental liquidity of $1.8 trillion should flow into world markets.

Source: hbjcapital