Warren Buffett has a bearish view on inflation.
Warren Buffet reasons that rising inflation is not the optimum point to buy assets because central banks focus on contractionary monetary policy, which destroys demand to bring inflation down. The negative consequences being that the economy deteriorates even further, liquidity is tight, and asset prices keep falling.
So if investors buy at this level where a bear market is in play, their portfolio could keep falling in value.
“Warren Buffet reasons that rising inflation is not the optimum point to buy assets”
WEALTH TRAINING COMPANY
Warren Buffett, has a bearish view on inflation, which is similar to another view traders and investors alike are familiar with: don’t fight the Fed
When central banks, who sit in the cockpit of asset prices, want to tackle inflation and implement tightening policies, do not get in their way as it will lead to deflated portfolios.
However, the level where the economy enters a recession, and most importantly, where central banks redirect monetary policy attention from inflation to stimulating the economy, is the price to buy.
In other words, the Fed is like the chief trader- When they buy assets to stimulate the economy, you buy assets, and when they sell assets to tackle inflation, you also sell assets.
So Warren Buffett has a bearish view on inflation, and he believes the longer inflation persists, the more it will compound and eat into consumer spending power, resulting in downward pressure that will eventually outweigh price increases.
“When central banks, who sit in the cockpit of asset prices, want to tackle inflation and implement tightening policies, do not get in their way as it will lead to deflated portfolios”
WEALTH TRAINING COMPANY
In a Fortune magazine article published in 1977, another time during which inflation was running hot, Buffett provided the following anecdote:
“The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5% passbook account whether she pays 100% income tax on her interest income during a period of zero inflation or pays no income tax during years of 5% inflation. Either way, she is ‘taxed’ in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 100% income tax but doesn’t seem to notice that 5% inflation is the economic equivalent,” wrote Warren Buffett.
So runaway inflation destroys capital, in the worst-case scenario leads to a hyperinflationary economic and financial collapse and is why Warren Buffett has a bearish view on inflation.
But In 1974, during a deep recession and peak market pessimism, inflation spiked to 12.3%, and GDP declined 0.5% as the S & P 500 had fallen more than 42%. The legendary investor made one of the most direct bullish calls in his career. “Now is the time to invest and get rich,” he said.
