Inflation Cometh And So Is A Big Market Correction

It was hilarious, no, sad actually, to see a piece last week by some market strategist mocking the “inflation truthers.”   Kind of like “election truthers?”

Of course, he surely knows the one thing that can knock the markets on their ass and keep them down is accelerating inflation.

Guess what, folks?  It’s here.

I just finished reading through at least 50 country PMIs (purchasing manager index) and almost all report accelerating inflation due to supply shocks and higher demand.  It’s not just a weak dollar thingy.

A positive second derivative of prices will tie the Fed’s hands in rescuing the market for the umpteenth time, and this dude, no doubt realizes, his year-end bonus would suffer.  Just sayin’.

Man, I dig Upton.

Call me a skeptic, because I am, and a contrarian, because I am. It’s my nature.  I guess my mother didn’t love me enough.

Nevertheless, I just try to read and interpret the data and decipher the signs of the time.

Yes, we do know Perma bulls are born with a .725 batting average and they think they are geniuses, as markets naturally go up.  Over the past 70 years, for example, the S&P has been in the red on annual basis for just 19 years.

It’s Why So Few Bears Own Park Avenue Apartments, or in the COVID era, so few islands off the coast of Nova Scotia.

A Clear Sign

The markets have once again become a social movement and everyone is now a genius.

I was lectured the other day by a friend, who said  I knew nothing because I didn’t understand that millennials are taking their stimulus checks and buying Bitcoin.  I tried to explain that was my point,  then asked if he knew what a price-earnings ratio was or what is the stock market captialization to GDP.

He dismissed me and said something to the effect,  “Nope, doesn’t matter, you’re an idiot.”  Credibility is all about timing, baby, but timing is impossible,

I will also tell you my definition of success for a bear market call. It is simply that sooner or later there will come a time when an investor is pleased to have been out of the market. That is to say, he will have saved money by being out, and also have reduced risk or volatility on the round trip. This definition of success absolutely does not include precise timing. (Predicting when a bubble breaks is not about valuation. All prior bubble markets have been extremely overvalued, as is this one. Overvaluation is a necessary but not sufficient condition for their bursting.) Calling the week, month, or quarter of the top is all but impossible. – Jeremy Grantham

I then tried to explain to him that markets don’t reflect a true fundamental reality because the government, via the Fed, has basically nationalized most of them through endless bailouts creating an alternative reality.  I conveyed that my investment philosophy is to buy low and sell high.

We then had a debate over Tesla, the stock that is minting money for him.  So he says.

He couldn’t distinguish between Tesla the car (we agreed the best in the world),  and Tesla the stock.

Carol K. has pounded into me there are always some stocks that will make you money even in a big bad bear so I mentioned to him I do like Taiwan Semiconductor, which trades around 55x earnings, and probably the most important company in the world, rather than Telsa that trades at 1,680x.

He called tonight and wants to buy  TSM.  Not all was lost.

Our sense is he is not the only one out there listening to the financial equivalent of QAnon shamans.

It. Is. Coming. Folks!

How Shall It Come?    

As you can see from the above global purchasing managers’ index, producers have to pay real money for real goods.  No hedonic quality-price adjustments to distort real price deltas. Moreover, it’s kind of difficult for the managers to substitute hamburger for semiconductors when prices rise due to supply shocks and excess demand.

One reason why the Fed prefers the PCE deflator over the CPI, by the way. Allows for mo’ substitution and lower stated official inflation.

The Nightmare Before Christmas Bear Market 

My best guess is that we are about to see a repeat of the 2018 Nightmare Before Christmas bear market, which I watched unfold from my hospital bed, by the way.   The 10-year yield spiked 45 bps after breaking through some strong resistance, which was, as usual, initially ignored by the market.  The market shamans argued higher interest rates are a good thing and a sign of a strong economy.  Until they aren’t.

Stocks began to buckle in early October 2018 and ended up falling almost exactly 20 percent, bottoming intraday on Boxing Day, the day after Christmas.  Then, only after Trump and Jim Cramer beat Jerome Powell over the head with an ugly stick for several weeks to ease up and bail out the market as Santa Claus bailed out of stocks. Gotta love the market socialists.

Rates Are Spiking

If you haven’t noticed, folks, the 10-year Note yield has more than doubled since August, up over 6o bps with valuations not exactly cheap, more than three standard deviations above their mean.

Wait, I thought the Fed was pegging the 10-year yield?  

U.S. Stock Market Valuation 

Another Policy Mistake

It also looks like another stimulus check is in the mail when the Dems take control of the White House and Senate on January 20th.   Any additional stimulus money should be specifically targeted to the leisure and hospitality sector, those people that have been hit hardest by COVID.

My sense is the Fed will begin to sweat razor blades as the economy shakes off this latest COVID surge.   There is way too much stimulus in the economy, which will soon begin to overheat — though some sectors will remain weak —  asset prices are out of control, and inflation is on the march higher.

You can’t print your way out of a supply shock without inflation, especially if there isn’t a credit contraction or problem in the banking sector.

Of course, a big downdraft in asset prices could tighten up financial conditions fairly rapidly, which is why we believe we are now in a binary economy, fluctuating between fears over inflation that sow the seeds of deflationary fears as asset markets sell-off.  The Fed to rescue,  inflation moves higher.

This wash, rinse, repeat cycle may soon be coming to an end, especially if the new administration doubles the capital gains tax on the plus $400k annual income crowd as they campaigned on.

Bid adieu to Goldilocks.

Poor Uncle Joe.  He has inherited one huge mess but thank God it’s Joe.

At least the Orange Man won’t have his Twitter account to pop off from the peanut gallery or… Leavenworth.

As always,  I reserve the right to be wrong.

Future Of GMM

On a personal note, we don’t know exactly the direction GMM is going to take.  I am very busy with my other job and dealing with many personal issues.  The website could look much different in a few months or fade into the sunset.

We are just waiting for Carol K.‘s health to get better.

After beating back a relapse of Ovarian Cancer with some intense chemo, she contracted pneumonia a few weeks ago and recently tested positive for COVID.   She is now fighting a three-front war with a compromised immune system and yet still manages to post on this site on occasion.  She is one tough lady.

Keep her in your thoughts and prayers.

She added so much to the Global Macro Monitor in 2020 with her excellent posts that made many of our readers a lot of money.

Carol and I have grown very close over the past year.  She is not only my best friend but my soulmate.   Godspeed, Carol K.!

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5 Responses to Inflation Cometh And So Is A Big Market Correction

  1. Mike says:

    Carol, get well, live long and thrive! You are the best in the west!

  2. Anonymous says:

    Good luck and best wishes to both of you!

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