Let's talk about inflation.

 We are all feeling the pinch from the current inflationary cycle. It's higher than it's been since Jimmy Carter, and in reality if you measure it the way they did back then, it's way higher. So what is it, and how bad is it?

Well, inflation is obvious. Prices going up. Simple, right? But what's the cause and what do we do about it?

The cause is too much money chasing too few goods. People want to buy things and there's no supply. The chinese flu shutdown is the primary cause, in my opinion. When the whole country shut down at the same time, supply lines shut down. Remember the toilet paper/paper towel shortage? That was just the beginning. Lumber mills shut down. Car makers shut down. Meat processing plants shut down. Food processing plants shut down. Factories everywhere shut down. So the supply line stopped.

Demand was still there, so the basic law of Economics 101 kicked in. Supply and Demand.

When there is demand and not enough supply, prices rise. It pretty much always happens, for a number of reasons, but the main one is that's how the market controls itself. Prices go up, demand drops and lets the supply side catch up. Same works in reverse. Too much supply and not much demand causes prices to lower, raising demand until the supply catches up.

A classic example of this is Harley Davidson. About 2000 everybody wanted a Harley. They had limited production based on historic sales, so Harleys were hard to get. You had to get on a waiting list and wait a year or more, then take whatever they got at whatever price they wanted, if you wanted a Harley. And they still sold out every year to the last bike. Supply and demand. So they responded by ramping up production, building more plants like the one by KCI in KC. And they produced more bikes. Then demand slowed about 2004 and Harley was overproduced. They finished the year with unsold inventory. They started offering incentives, free accessories with the purchase of a bike. But their stock crashed, they had to slow production, lay off workers and close plants. Supply and demand took them from the catbird seat to near bankruptcy, because they didn't read the future very well.

So what we are seeing right now is partly to blame on the global shutdowns, and part on the Fed keeping interest rates too low, and part on biden's crazy spending. 

Now the bulk of biden's spending hasn't happened yet, he has to get it through congress so as much as I would love to blame him that's a fairly small part, right now. Low interest hurts. But the supply issue is the real culprit.

Lumber is a great example. Lumber prices are crazy, as you know if you have bought any. The lumber mills shut down for almost a year and supply ran out without much drop in demand. That drove up lumber prices to crazy levels. Supply and demand. Way too much demand, no supply. Not just low supply, almost none. 

So the good new. Lumber futures for July delivery have fallen 41%, from a record high of $1,711 to $1,009. Futures are what investors are prepaying for July delivery of a commodity. If you think prices are going up, you buy at today's price and sell it at the July price. As futures go, prices follow. The framing composite index which tracks daily sales has fallen dramatically. So the lumber hoarders will be selling fast or be eating a lot of product as the mills outproduce demand. Look for lumber prices to fall, maybe close back to normal.

So hopefully this is temporary. I've talked to my financial advisor and we've agreed to treat this as temporary. If I thought inflation was back at this rate, I would be repositioning in the market. I moved to a more risky position when Trump was President and it paid off. I haven't backed off at this point and I'm holding so far.

But remember, this is one opinion. And I could be wrong. I'm just having a conversation here. Feel free to let me know what you think.