There was a lot of discussion about reflation the past few weeks as hedge funds and investors jockeyed to position themselves. This is not a new trade idea, as it was popular back in 2009, but inflation is always an important topic.
What is reflation?
Simply put, the central bank or government tries to stimulate the economy after an economic downturn. They can do this by increasing the money supply or reducing taxes or changing interest rates.
What is the reflation trade?
Rewind back to 2009. The US was in of the worst recessions in years and the central bank responded by stimulating the economy using the methods described above. The reflation trade refers to buying assets that do well when the central bank takes such measures. Commodities (Gold, Copper, Silver, etc.) or stocks of companies that mine these materials perform well in a simulative or inflationary environment. However, that inflation never materialized and investors that made reflation bets saw some initial gains followed by several years of losses.
Fast forward back to present day, finally the measures taken several years ago, are paying off and inflationary signals are starting to appear. While these measures usually are reserved as a “for emergencies only” tool, Trump has also signaled using them to super charge the US economy. Investors have scrambled since the election to take advantage of a reflation bonanza.
Copper has shot up since the election, a direct result of hedge funds loading up on reflation bets.
Why should anyone care?
Reflation, inflation, deflation, blah, blah…these seem like useless terms used only for finance nerds. Why should anyone care, right? You should. The price of everything you buy or own will be affected by how much or little inflation there is in the future. The price of a high ticket item like your home or stock portfolio would be affected the most. While it’s impossible to predict inflation levels (many try and fail), it’s good to own things that do well when inflation is increasing and own other things that do well when inflation is decreasing. This will minimize risk.
So stayed tuned as it will be interesting to see how it plays out in the coming months.
Have a great week!
– The Risk Runner