My 1-2 Year Prediction: Inflation is going to collapse dramatically, one way or the other. This is not bullish for stocks, however.

I made the mistake of drinking coffee at night, so I decided to make a prediction for the hell of it.

I. The Fed is going to overreact. It's not going to observe inflation falling dramatically until it is too late. Economic data is always lagging–the Fed going to stand by its brisk pace as political pressure from Congress and news media ramps up. The Fed has a credibility problem–a political credibility problem, not a credibility having to do with its hypothetical ability to fight inflation. The Fed is going to manufacture a mild recession that brings down gas prices by curtailing demand: eliminate all the trees to stop the forest fire.

II. Prices are a powerful signal to markets; when there are severe shortages in food, oil, natural gas, metals/minerals, transportation, this sends signals throughout the entire market that that are huge profits to be made. Look at what happens every time there is a huge bull run in commodities? It ends in a spectacular collapse in prices as firms all across the world compete to extract as much of these margins. Oil is a highly competitive asset, that yes, depends on a longer-term cycle of capital expenditures–but I think global governments have it in them to fast-track production cycles if crises really get that bad.

We already see this in shipping prices, lumber, and trucking, for example. There are massive increases in capacity scheduled for 2023 in shipping. Refinery output will take a year or two to really increase, and crude oil is slowly starting to increase in production. The administration will likely start to make it easier for the oil majors to get oil to the market, to save its political skin.

The notion that we will have a long-term elevation in inflation is inconsistent with global markets and profit incentives.

We will not have inflation forever, and more likely than not, it's going to fall in a mild (or worse) recession and a glut of inventories arriving as that demand eases. My prediction is that by year end or early 2023, we will start to see news articles worrying about the Fed going too far.

Sometimes, when talking about markets, we don't think about how it can change rapidly in fundamental ways that impact how production cycles even function at all. Remember all those scientists saying we wouldn't have a Covid vaccine for a decade? How many billions of vaccine doses have now been administered in 2 years? In a time of crisis, my bet is that humanity figures this shit out.

Connection to stocks: For this reason, I think basing your portfolio off of the expectation of elevated inflation is a mistake unless it's very short term. Inflation can disappear as fast as it appeared. So being 80% in commodities, shorting bonds, etc. is a very very risky bet.