Go With Your Heart
Tomorrow, Wednesday, will be a huge day for markets. In fact, Wealth Research Group argues that many of the major asset classes, including the three biggest ones, could either peak or bottom, all following tomorrow’s announcement.
The market’s greatest threat, its ultimate scare, is that of stagflation.
Those under the age of 60 don’t even know what life is like during stagflation, because apart from a fake period in 2005 (which never materialized), the last known stagflation was in the 1970s, following the Nixon Shock.
The reason that stagflation is a shitty mess is because inflation is well above the pace of real growth, which creates a cycle of lower consumer spending and decreased profit margins.
Nobody wants to see stagflation, but the current sentiment is pricing in that possibility. This means that if the consensus is wrong and inflation doesn’t overshadow growth, September’s and October’s market weakness have been a massive buying opportunity, had one capitalized on them. Personally, I think we aren’t coming roaring back for a few more months, but I do like a discount, regardless.
As you can see, stagflation results in sub-par returns on the rare times it occurs:
Times of stagflation generate the worst of all market returns!
If a market that even slightly behaves like that is coming, this would explain why cryptocurrencies have surged in 2021, why tech stocks have faltered badly, why rates are going higher and why gold looks to have bottomed.
If the market is wrong, which we will start to understand as the CPI numbers come out tomorrow, then many asset classes could rotate and get re-rated, big time.
The question that now remains is this: To what will the market rotate?
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Basically, is the rotation from stagflation, back to inflation, or will tomorrow’s numbers start to inflect down, showing the transitory period is coming to an end?
Rates will continue climbing, and more pressure on the FED and Congress will be applied, since what they do and how they react has suddenly become really important.
I want to explain why rising bond yields impact prices so much, especially stocks, but even more so real estate – because while many people own equities, many more own houses.
The global economy has been operating for years and years on zero and negative interest rates; in that type of world, it’s not possible to reliably generate interest from government bonds and from a bank account yield, two sources of fixed income that practically everyone relied upon up until the early 2000s.
When that ended, trillions of dollars were suddenly homeless and looking for a new shelter, so they went into real estate and commodities and the great supercycle of the 2000s began.
What we have lost in 2021, as a global economy, is the uniformity of the supply chain across continents.
This isn’t some small change, and with it come major investments in the field of manufacturing, plus huge bailouts have altered the workforce in terms of the interest rates environment. Taking that into account, I just don’t see how asset prices can fall much further, but I do want to stress that the more investors there are who earn income with the traditional government bonds, the less they have to risk in equities and real estate.
We believe that the world can’t and won’t go back to normal rates, so we aren’t afraid of buying stocks and real estate, but if we’re wrong, the edge we’ve placed with cryptocurrencies has more than compensated for this, as this asset class has more than doubled annually.
Tomorrow, CPI numbers will mean the world for the markets – stagflation or a big scare over nothing – keep your eyes peeled for the data release!
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