Prepare For Disappointment - 8/29/2021
ES at the 8 hour view.
As I stated back in early spring, 2021 would be the year of disappointment. Permabulls don't get their miracle returns like in 2020. Permabears don't get their 2020 style crash. There would be many boring days with episodes of volatility.
How did I know this? It's because these conditions were similar to 2010 and I remember trading/investing that year. Right after the worst of a recession, the market would play musical chairs between two fears. 1) Reflation or 2) Low economic growth (with low inflation).
During times of reflation scares, that's when commodities, cyclical stocks (e.g. banks), and crypto are favored. Big tech is left alone. When the reflation scares are over, the next fear is low economic growth. That's when investors try to find companies that grow faster than the economy.... which ironically, the stock market is not the economy. Big tech is the chief candidate to hedge against this low growth fear. That's why you see the NQ rise dramatically from April to July. Lo and behold, the Q2 earning reports were worried about low growth.
Why do I say reflation and stagflation? Here is a question. After a pandemic, do you think there would be more or less spending (velocity of money)? The answer is less spending. Behavioral changes include developing more stay-at-home technologies, less traveling, and less eating out or going out. More need for automation means less people to pay which also decreases velocity of money. The initial post-pandemic years see an uptick to inflation rates. However after year 3 of post-pandemic, the inflation rates plummet for years. This happened during the 1920s too after the Spanish Flu. For example, home refrigeration was invented which decreased money flow (food supply chains). Link is here: voxeu.org/article/in...h-wars-and-pandemics
This historical and economic lesson were the deflationary forces that Jerome Powell was talking about for 16 months. This also served as a basis to Quantitative Easing.
You need both money supply and velocity of money to cause true runaway inflation. It's like gasoline and the fuel injector system of your car. You can have a lot of gas, but not much is actually going to the engine. That's what's going on now. There is a big money supply, but not enough spending. That said, you can still take advantage of hedge funds running up speculative inflation which caused that crazy commodity and crypto run until the CPI reports came out.
Why did inflation rates increased so much from last year? Think about the equation. CPI is comparing year-over-year. What were we doing during spring and summer 2020? Lockdown. We were not spending all that much. Vendors had to sell at a severe discount to make their sales. So, you're comparing an athlete who is running today (2021) to where s/he was last year... in the hospital (2020). Do you see how skewed that comparison is?
Trivia: Want to know a big factor contributing to the semiconductor shortage? It takes 2,200 gallons to produce 1x 30cm wafer. Taiwan has been facing one of the biggest droughts in its history (asia.nikkei.com/Busi...hase-for-chip-sector). Simply, no water means no semiconductor production. That causes supply chain issues and causes heightened "inflation."
If history rhymes like in 2009-2012, then there should be a second inflation scare (speculation). That second inflation scare should help cyclical stocks, commodities, and crypto out. 2011 had that second inflation scare. That keyword is speculative. It means that hedge funds will think inflation is not transitory and head to reflationary trades. As soon as they are proven wrong (again), they will dump those reflationary trades like what happened in May 2021.
As I stated back in early spring, 2021 would be the year of disappointment. Permabulls don't get their miracle returns like in 2020. Permabears don't get their 2020 style crash. There would be many boring days with episodes of volatility.
How did I know this? It's because these conditions were similar to 2010 and I remember trading/investing that year. Right after the worst of a recession, the market would play musical chairs between two fears. 1) Reflation or 2) Low economic growth (with low inflation).
During times of reflation scares, that's when commodities, cyclical stocks (e.g. banks), and crypto are favored. Big tech is left alone. When the reflation scares are over, the next fear is low economic growth. That's when investors try to find companies that grow faster than the economy.... which ironically, the stock market is not the economy. Big tech is the chief candidate to hedge against this low growth fear. That's why you see the NQ rise dramatically from April to July. Lo and behold, the Q2 earning reports were worried about low growth.
Why do I say reflation and stagflation? Here is a question. After a pandemic, do you think there would be more or less spending (velocity of money)? The answer is less spending. Behavioral changes include developing more stay-at-home technologies, less traveling, and less eating out or going out. More need for automation means less people to pay which also decreases velocity of money. The initial post-pandemic years see an uptick to inflation rates. However after year 3 of post-pandemic, the inflation rates plummet for years. This happened during the 1920s too after the Spanish Flu. For example, home refrigeration was invented which decreased money flow (food supply chains). Link is here: voxeu.org/article/in...h-wars-and-pandemics
This historical and economic lesson were the deflationary forces that Jerome Powell was talking about for 16 months. This also served as a basis to Quantitative Easing.
You need both money supply and velocity of money to cause true runaway inflation. It's like gasoline and the fuel injector system of your car. You can have a lot of gas, but not much is actually going to the engine. That's what's going on now. There is a big money supply, but not enough spending. That said, you can still take advantage of hedge funds running up speculative inflation which caused that crazy commodity and crypto run until the CPI reports came out.
Why did inflation rates increased so much from last year? Think about the equation. CPI is comparing year-over-year. What were we doing during spring and summer 2020? Lockdown. We were not spending all that much. Vendors had to sell at a severe discount to make their sales. So, you're comparing an athlete who is running today (2021) to where s/he was last year... in the hospital (2020). Do you see how skewed that comparison is?
Trivia: Want to know a big factor contributing to the semiconductor shortage? It takes 2,200 gallons to produce 1x 30cm wafer. Taiwan has been facing one of the biggest droughts in its history (asia.nikkei.com/Busi...hase-for-chip-sector). Simply, no water means no semiconductor production. That causes supply chain issues and causes heightened "inflation."
If history rhymes like in 2009-2012, then there should be a second inflation scare (speculation). That second inflation scare should help cyclical stocks, commodities, and crypto out. 2011 had that second inflation scare. That keyword is speculative. It means that hedge funds will think inflation is not transitory and head to reflationary trades. As soon as they are proven wrong (again), they will dump those reflationary trades like what happened in May 2021.