Preparing for Take Off — The Inflation Versus Deflation Narrative.

You hear a screeching metallic sound as the platform moves away.

We are in autosequence,’ says the voice through the intercom.

You feel the floor shake as you go through the engine checks.

T-10, 9, 8, 7, 6…

Flames roar out from under the rocket, the bright light blinding you momentarily. And then, there’s take off…

Did you watch New Shepard’s launch this week? In what Amazon founder Jeff Bezos dubbed as ‘the best day ever’, he, along with his brother Mark, Wally Funk, and Oliver Daemen officially become astronauts.

On Tuesday, exactly 52 years after the first astronauts landed on the Moon, New Shepard hit three times the speed of sound. The capsule then detached from the booster to go just pass the edge of space, the Karman line.

The Karman line is the border that divides the Earth’s atmosphere from outer space. It is at an altitude of approximately 100 kilometres from the Earth’s sea level, and it’s where the atmosphere becomes extremely thin. So thin, that planes can’t travel fast enough to pass through. In other words, you need a rocket.

But not everyone agrees with this border definition. NASA, for example, sees the space border at 80km from sea level. In fact, the Karman line has become a huge sore point of contention between Bezos and Virgin Galactic founder Richard Branson, who flew into space a few days earlier reaching an altitude of 86km.

Both companies along with Elon Musk’s SpaceX are competing to make commercial space travel a reality. And they’re getting very close to it with reusable rockets. Instead of getting destroyed after one use, these rockets can land after a flight and be reused many times, which makes the whole thing much more cost-effective.

But I digress.

We imagine Bezos had been dreaming of this moment for decades, well before he founded his space company Blue Origin in 2000.

And it’s been a long ride, testing prototypes for over 10 years along with 15 successful test flights without passengers daring to go into space.

It’s probably been an even longer journey for fellow astronaut Wally Funk, who is now the oldest person to have gone into space.

Funk was part of the Mercury 13 program, which tested women to pass the same tests as NASA’s Mercury astronauts. Yet the program never sent her into space.

If astronaut movies are anything to go by, you know that training for space is quite demanding. Astronauts needed to be in top shape, train in zero gravity, and spend hours in flying simulators training for anything that could go wrong. It took years to prepare.

While New Shepard is fully autonomous and the whole flight took only around 11 minutes, that’s not to say the most recent astronauts didn’t have to undertake training.

For 14 hours they learned everything there is to know about the capsule, and to prepare for the unexpected like fires or leaving the spacecraft in a hurry.

I’ve been thinking a lot about that this week, about what could happen next, and how to prepare.

At the moment, in financial markets there are two different narratives making the rounds: there’s the inflation versus deflation narrative.

On one hand, we’ve seen higher consumer inflation in the US and in materials like timber. The pandemic has affected supply chains, which is translating into higher costs. Here in Australia, we’ve seen inflation in asset prices with higher property prices, and more recently higher rent prices.

There’s talk that this surge in inflation is transitory.

In fact, Joe Biden spared a few minutes recently to appease any concerns:

The vast majority of the experts, including Wall Street, are suggesting that it’s highly unlikely that long-term inflation is going to get out of hand.

On the other hand, we’re seeing a resurgence in cases and more restrictions because of the Delta variant, which could mean more lockdowns, less spending, and deflation. Oil prices have also fallen slightly after OPEC reached a deal and there were higher US inventories.

In my mind, the only thing that is clear is that central banks aren’t anywhere near done with stimulus, even if inflation shows.

This week, the European Central Bank said it will keep rates low until it sees inflation near its 2% target. As they said, this ‘may also imply a transitory period in which inflation is moderately above target.

At the moment, it’s all pointing to financial repression, that is, when interest rates are kept lower than the rate of inflation to reduce debt.

In that case, real assets like gold could do well.

But then again, there really is no telling how this will play out.

I remember in one of my first jobs, before any important meeting, my boss and I would sit down and try to think of every possible scenario that could come up during the meeting and we would plan a response. The idea was to try not to get caught off guard.

It’s an exercise I still practice often today.

The future is looking very obscure, and the economy is very distorted from all the stimulus…so plan accordingly.

Best,

Selva Freigedo Signature

Selva Freigedo,
For The Rum Rebellion

PS: Selva is also the Editor of New Energy Investor, a newsletter that looks for opportunities in the energy transition. For information on how to subscribe, click here.


Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.


The Rum Rebellion