A recent post on CNBC discussed Bob Farrell’s 10-Investing Rules. These rules have withstood the test of time as it relates to long-term investing.
Here’s a list of Farrell’s 10-rules:
- Markets tend to return to the mean over time
- Excesses in one direction will lead to an opposite excess in the other direction
- There are no new eras — excesses are never permanent
- Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
- The public buys the most at the top and the least at the bottom
- Fear and greed are stronger than long-term resolve
- Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
- Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend
- When all the experts and forecasts agree — something else is going to happen
- Bull markets are more fun than bear markets
However, given more than a decade of QE-driven bull market advance, I wondered what they might be like if Bob Farrell was alive today. Would he have changed his mind?
With this in mind, I present Bob Farrell’s 10-Investing Rules For A “QE” Driven Market. (Tounge firmly implanted into the cheek, of course.)
1) Markets Remain Deviated From The Long-Term Means Over Time
Bob believed that stock prices get anchored to their moving averages. As such, with regularity, prices must and will revert to and beyond those means over time.
However, as any young retail investor will tell you, such “boomer” ideas must be “put out to pasture,” as they say in Texas. All you need is a fresh round of “stimmies,” some “rocket emojis,” and you have all the ingredients necessary for a bull market.
Sure, prices certainly get overextended, but any dip is a buying opportunity because the “Fed put” ensures any downside is limited.
2) Excesses In One Direction (On The Upside) Lead To More Excesses
“Ole’ Boomer Bob” antiquated notion that markets, which can and do overshoot on the upside, will also overshoot on the downside, is also clearly wrong. The further markets swing to the upside, the higher they should go.
There is no reason not to buy stocks as long as there are low interest rates, liquidity, and a mobile trading app. Sure, prices are a “smidge” above fair value, but valuations are such an antiquated metric. Also, plenty of articles suggest the “P/E” ratios are terrible market timing devices, so why even pay attention to them?
Sure, the market-capitalization ratio is almost 3x what the economy can produce, but we have never been in a market like this before. With all the Fed and Government money paying for everything, there is no reason to be productive when everyone can stay home, trade stocks and play “Call of Duty – Warzone.”
3) There Are No New Eras – Except This Time As Excesses Are Permanent
There will always be some “new thing” that elicits speculative interest. Over the last 500 years, there were speculative bubbles involving everything from Tulip Bulbs to Railways, Real Estate to Technology, Emerging Markets (5 times) to Automobiles, Commodities, and Bitcoin.
Jeremy Grantham posted the following chart of 40-years of price bubbles in the markets. During the inflation phase, each got rationalized that “this time is different.”
But Jeremy is an old “boomer” that doesn’t understand current markets.
Multiple media sources pen articles stating valuations don’t matter. As long as interest rates are low, the Fed provides liquidity; stocks can only go up. That is a much better narrative, and if I put out a 1-minute video on “Tik-Tok,“ I can get a bunch of followers.
4) Rapidly Rising Markets Go Further Than You Think, But Correct By Going Even Higher.
The reality is that excesses, such as we are seeing in the market now, can indeed go much further than logic would dictate. However, these excesses, as stated above, are never worked off simply by trading sideways. Instead, excessively high prices are “corrected” by prices just going higher in this new market.
That makes complete sense to me.
5) The Public Buys The Most And The Top, And More At The Next Top
After more than a decade of Fed interventions, investors believe that buying at the current “top” will be a bargain compared to an even higher top coming. Sure, logic would dictate the best time to invest is after a sell-off, but if you have “Diamond Hands,” you need to keep buying because prices will only go up.
6) Fear (Of Missing Out) And Greed Is All That Matters
As stated in Rule #5, emotions cloud your decisions and affect your long-term plan.
“Gains make us exuberant; they enhance well-being and promote optimism,” says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “Losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”
What is clear is that Meir Statman does not have “Diamond Hands.” While he is correct, there are only two primary emotions any investor should have.
- FEAR – The “Fear Of Missing Out;” and,
- GREED – The “Cojones” to take out debt, lever up. and ramp your “risk bets” in this one way market.
In the words of Warren Buffett:
“Buy when people are fearful and sell when they are greedy.”
Clearly, “Boomer Buffett” doesn’t get it either. But, of course, he is the same idiot sitting on $150 billion in cash whining because he can’t find anything to buy. So if he was indeed an “Oracle,” why didn’t he load up on AMC and GameStop?
7) Markets Are Strongest When The Fed Is Dumping Liquidity Into The System
“Breadth is important. A rally on narrow breadth indicates limited participation and the chances of failure are above average. The market cannot continue to rally with just a few large-caps (generals) leading the way. Small and mid-caps (troops) must also be on board to give the rally credibility. A rally that “lifts all boats” indicates far-reaching strength and increases the chances of further gains.” – Every “Old” Technical Analyst
Sure thing, “Boomer.”
To crush the market, all you have to do is buy the 10-fundamentally worst companies that have the highest short-ratios, leverage it up with margin debt and options, and sit back. Then, the “ATM” will start spitting out money.
All you need to watch is for a change in the Fed.
“The high correlation between the financial markets and the Federal Reserve interventions is all you need to know to navigate the market.“
Those direct or psychological interventions are all you need to justify taking on all the speculative “risk” you muster.
8) Bear Markets Have Three Stages – Up, Up, and Up.
“We don’t have no stinkin’ bear markets.”
Any decline in the market is just a good reason to take on even more risk. Given the Fed will stop any market crash by injecting trillions in liquidity, buy.
After all, before the “economic shutdown,” I had to work three jobs (Uber, Lyft, and Amazon delivery) to make ends meet. Now, I sit at home, trade stocks, and make “TikTok” videos about all the money I am making. Plus, once I get to 100,000 followers, I increase my income by doing affiliate marketing and getting my followers to trade on Robinhood.
What could go wrong with that?
9) When All Experts Agree – Whatever They Agreed On Is Likely To Happen
Another old “boomer,” Sam Stovall, the investment strategist for Standard & Poor’s, once quipped:
“If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”
Well DUUHHHH!!! Who wants to sell? That is just stupid.
10) Bull Markets Are More Fun Because Bear Markets Don’t Happen Any Longer.
What should be clear by now to anyone is that after 12-years of monetary interventions, “Bear Markets” can no longer happen.
So, suck it up, quit your complaining, and “Party On Garth.”
This Time Isn’t Different
If you detected a hint of sarcasm in today’s post, don’t be surprised.
Like all rules on Wall Street, Bob Farrell’s rules are not hard and fast. There are always exceptions to every rule, and while history never repeats exactly, it often “rhymes” closely.
Nevertheless, these rules get ignored during periods of excess in markets as investors get swept up into the “greed” of the moment.
Yes, this time certainly seems different. However, a look back at history suggests it isn’t.
When the eventual reversion occurs, individuals, and even professional investors, try to justify their capital destruction.
“I am a long term, fundamental value, investor. So these rules don’t really apply to me.”
No, you’re not. Yes, they do.
Individuals are long-term investors only as long as the markets are rising. Unfortunately, despite endless warnings, repeated suggestions, and outright recommendations, getting investors to manage portfolio risks gets lost in prolonged bull markets. Unfortunately, when the fear, desperation, and panic stages get reached, it is always too late to do anything about it.
Those with “Diamond Hands” will eventually sell at the worst possible time.
Just remember, “Old ‘Boomer Bob’” did warn you.
The post Bob Farrell’s 10-Investing Rules For A “QE” Driven Market appeared first on RIA.
Business As Usual Despite Omicron
Investors hoping that Friday’s release of the November…
“Business As Usual” Despite Omicron?
By Jane Foley, head of FX strategy at Rabobank
Investors hoping that Friday’s release of the November US labor market would be a simple tick-box exercise for the Fed’s move towards policy normalisation were likely disappointed. The headline non-farm payrolls report at 210K was only about half what the market had expected it to be, though the shock of this number was lessened by talk of a potentially unreliable seasonal adjustment in addition to a strong set of data from the household survey. The latter showed a sharp drop in the unemployment rate to just 4.2% in November. For many this will have been sufficient for the Fed to continue preparing to announce a hastening in the pace of tapering of its bond buying program at the December 14/15 FOMC meeting. After a volatile fortnight on the back of fears of a more hawkish Fed, the Nasdaq closed down 1.92% on Friday. While Asian stocks this morning mostly followed US stocks lower, futures are showing signs of resilience.
Despite the confusion surrounding the economic implications from the Omicron variant, Fed Chair Powell and other FOMC members had suggested a ‘business as usual’ approach to policy last week by suggesting that a hastening in the pace of QE tapering very much remained on the cards. The fact that the market consensus for this week’s US November CPI inflation release stands at a eye-watering 6.7% y/y will be seen by some as an endorsement of the Fed’s hawkish tone.
That said, the IMF has warned of growth risks stemming from Omicron and other central banks seem prepared to take a more cautious approach. The BoE’s Chief hawk Saunders, who voted for a rate hike in November, suggested on Friday that he would like more information on Omicron before deciding how to vote on policy next week. The UK money market has backed away from fully pricing in a BoE rate hike for December, though a February move is still on the cards. Both the BoC and the RBA are due to meet this week and steady policy is expected from both. Omicron is likely to provide the RBA with further reason to extend its already dovish position. That said, the strong rise in Canadian employment in November is feeding speculation that the BoC could bring forward rate hikes, with April being touted by commentators as a possible start date for policy tightening.
There have been various headlines in recent days in a slew of countries about additional restrictions being put in place in an effort to slow the transmission of Covid. Over the weekend police in Belgian used water cannon and tear-gas to disperse violent protests against fresh restrictions. Germany last week announced social curbs on the unvaccinated while Greece introduced fines on the over-60s who refuse to be jabbed.
As evidenced by the protests, none of this sits comfortably in liberal democracies with some premiers, such as UK PM Johnson, likely very nervous of a backlash from any further fresh restriction. Omicron has now been detected in seventeen EU countries and US data suggest that Omicron has spread to around one–third of US states, though Delta remains the dominant variant. Encouraging there have been several press reports indicating that while Omicron may increase the risk of transmission, the symptoms may be milder. This view was endorsed by US infectious disease official Fauci over the weekend who commented that “thus far it does not look like there’s a great degree of severity to it.” That said, S. Africa is preparing its hospitals for more admission, though its low vaccine rollout rate will be a factor.
Bitcoin took a tumble over the weekend as profit-taking picked up momentum. Gold found support on the fall back in longer term bond yields and oil prices picked up some support after Saudi Arabia raised prices for crude sold to Asia and the US. No real progress appears to have been made on reviving the nuclear deal between the US and Iran.
President’s Biden and Putin will speak via video call on Tuesday amid mounting tensions over Ukraine. This follows reports from US Secretary of State that there was evidence that Russia had made plans for a ‘large scale’ attack on Ukraine. It is expected the Biden will reaffirm US support for the sovereignty and territorial integrity of Ukraine. Bloomberg news have reported that over the weekend there was a ‘testy exchange’ between US Secretary of State Blinken and Russian Foreign Minister Lavrov over Ukraine with the former recapping events in 2014 when more than 100 people participating in a peaceful protests were killed.
Evergrande is back in the headlines this morning following a statement from the Chinese property developers on Friday saying that creditors had demanded USD260 million and that it could not guarantee enough funds. Chinese government officials summoned Evergrande’s Chair and the PBoC has stepped up its criticism of the company accusing it of ‘poor management’ and pursing ‘blind expansion’. Reports in Chinese state media that Beijing will cut banks’ reserve requirement ratio ‘in a timely way’ lent a little support to mainland Chinese blue chips overnight
A decidedly weak -6.9% m/m print for October Germany factory orders this morning is a sharp reminder of the headwinds facing the Eurozone’s largest economy. Tomorrow, German ZEW survey data is also expected to soften. Key UK data this week includes monthly GDP data and production numbers for October. In addition to the November CPI inflation data, the US calendar also includes the December Michigan confidence survey. Ahead of next weeks Fed, ECB, BoE and BoJ policy meetings little additional direction can be expected from central bankers leaving more room for investors to seek clues from this week’s BoC and RBA policy meetings.
Toward the Final Transition
A Book Review of Grand Transitions: How the Modern World Was Made, by Vaclav Smil.1
Over the last two decades, Vaclav Smil has produced a series of outstanding…
- A Book Review of Grand Transitions: How the Modern World Was Made, by Vaclav Smil.1
Smil’s most recent book, Grand Transitions, brings together his main concerns and interests. The subject of the book is the popular one of the nature of modernity and the modern world, the ways in which they differ from the greater part of the historic human past, and the process by which the old world of traditional society gave way to the one we now inhabit:, the modern. The work deftly combines two ways of addressing these:, by identifying and quantifying the novel or contrasting features of modernity as compared to the traditional, and by setting out and quantifying the processes that brought these into being. This also makes possible the subject matter of the final part of the book, which is an argument about what the future may hold. Revealingly, this last part is done more in terms of negatives—arguments about what will almost certainly NOT happen rather than extrapolations or forecasts of what WILL happen. The reason for this is the (correct) argument that we can be much more certain about what is impossible or highly unlikely than about what is possible. It would be easy for such an expansive survey to become ill-defined and sprawling but Smil avoids this with because of his clear conceptual framework and the argument that flows from it, something that draws upon his previous work.
The key concept is that of a transition. This is not original to Smil, of course, but is widely employed in discussions of modernity. The way it works is to identify in a major area of human life—such as demography, politics, or economics—the dominant features of the traditional world that we can see persisting across the centuries and variations of geography and culture and compare and contrast them to the persistent and dominant features of the contemporary world. The next step is to identify and describe the way one changed into the other over the last two to three centuries (never more than that), and so to define the nature of the transition from the one to the other. What this makes possible is a quantitative approach that also examines qualitative questions. The issue that is not easily addressed—either in Smil’s work or others like it—is that of causation, of what it was that caused the transitions. Smil’s own approach is resolutely empirical, and he explicitly argues against the use of theoretical models (especially those involving advanced and complex mathematics) and elaborate abstract theory. He takes the view that attempts to identify causes for observable major changes are almost always bound to fail because of methodological challenges but, above all, because of the central role of contingency and randomness in the historical human story. The reason for this is the nature of complex systems (examples being with both human societies and natural ecosystems being examples of that) and the difficulty of directly linking outcomes to preceding states in such a system, along with the notorious problem of high dependence upon random initial conditions and strong path dependency. What one can do—and he does expertly—is to present a careful account of the shifts and processes, as accurately as possible given the limitations of evidence. This modest approach is refreshing and welcome when we contrast it to the elevated claims to insight and knowledge that we find elsewhere.
Smil identifies four key transitions—the ‘”grand transitions”’ of his title. These are: demographic, agriculture and diet, energy, and economic. For many, the most familiar for many is the demographic, the transition from a world of high birth rates and high mortality levels—particularly among children—to one of low birth rates (often below replacement level) and low death rates. The transition involves a time period when for some time the birth rate remains high while the death rate falls with a dramatic rise in population as a result until the birth rate declines. This transition has been completed in many parts of the world but is still in process in others. All the indications are that it will have happened everywhere by the middle part of this century. One aspect of this transition that is now becoming apparent is an ageing of the population, with an unprecedentedly high proportion of the population being elderly. The second—agriculture and diet—is marked by the movement from a world of subsistence where food production was often precarious, to one where a combination of economic integration and technological innovations (such as artificial fertilizers and pesticides) plus innovation in both varieties of crops and farming methods has produced a level of food supply that our ancestors would have seen as abundant. Smil emphasizes how this is not simply a matter of more food of the traditional kind being produced and consumed as there has also been a dramatic transition in diets with a move towards much greater variety and, generally, much higher intakes of fats and refined carbohydrates and meat (as opposed to grain products). This has pled to the novel situation of health problems caused by overeating rather than starvation and malnutrition.
The last two are separate in Smil’s account but reading the relevant chapters reveals that for him economic and energy transitions are so interconnected that it could make sense to see them as a single phenomenon. The economic one is the well-known path in which we have gone from a world where living standards were low for the overwhelming majority and very stable over the long term despite periodic fluctuations to one where they rise steadily. The energy transition is the movement from a world where the primary source of energy is human and animal muscle power—augmented where possible by wind and water—to one where these are enormously added to by energy derived from fossil fuels and, more recently, nuclear and renewable sources. The two transitions are connected because of the way that the great increase in productivity (and, hence, living standards) since the early nineteenth century is clearly in large part connected to the increasing employment of these new sources of energy—notably but not only in the form of electricity.
All this raises several questions. There are four transitions for Smil, but could we also argue that there are others? The obvious candidate is innovation with a transition from a world where innovation was rare, slow to be adopted and diffused, and systematically restrained and discouraged by both overt power and social institutions, to one where it is omnipresent, rapid, and generally lauded (at least officially). This clearly plays a part in all the other transitions. I suspect that the reason why Smil does not add this is because it is much more difficult to measure (given that, for various reasons, patents are for various reasons not a reliable measure and, in any case, only exist for the period since the other transitions were under way). Another question is this: the four transitions are clearly interconnected but might we argue that one is foundational and driving all the rest? The best candidate for that is the energy transition, but even there it is not clear how that can be seen to have caused the demographic one. Smil shows that the evidence does not support the common belief that it is the economic transition that drives the demographic one if anything the opposite is true. Alternatively, and more in line with Smil’s own approach, might we argue that the four transitions are so interdependent that none of them could take place singularly and that all four had to happen together or not at all?. This would emphasizse the degree to which we are dealing with a complex phenomenon that can be measured and described but which resists analysis, much less prediction.
That in turn brings us to the final part of Smil’s work, which summarizes much of his previous writings, and looks at where we are now and what is the likely future of these transitions is. One central point, —which is why he uses the term ‘”transitions”—is that, in his view, it is overwhelmingly unlikely that the processes that have produced these transitions will continue indefinitely or even for much longer. Instead of an open-ended process, what we will have is a movement from one stable state to another, a step change and hence a transition (as opposed to e.g. a ‘”take-off”’). The way this can be put mathematically is that we are not looking at exponential curves in the various indicators but logarithmic ones (S curves). The argument Smil makes—here and elsewhere—is that the transition is almost complete and that therefore we are therefore approaching the top of the logarithmic curve where it rapidly flattens out. For example, this implies for example that we are coming to the end of an era of economic growth and arriving at the steady state predicted by inter alia Adam Smith and John Stuart Mill. Another implication is that population growth will fall dramatically and be succeeded by decline until there is a new steady state, while yet another is that both the impact and rate of innovation will decline. If true, aAll of this has far-reaching implications if true. So much of our political thinking, for example—in all parts of the spectrum—is built around the presumption of continued growth that it will be a radical disruption if this does stop. It will make sense, in that case, to return to the thinking—and maybe even the practice—of thinkers from earlier periods who did not have that foundational presumption, or at least to update them.
One thing Smil argues very forcibly is that we will not see either a continued growth in energy usage or a major switch to renewable energy. He reiterates the argument he has made elsewhere that this is extremely unlikely because of the fundamental problem of energy density. The great advantage of fossil fuels is that they contain large quantities of energy in lightweight and compact form, so they have a high density, which in turn means they can do a lot of work. By contrast, renewable energy sources—particularly solar power and wind power—are diffuse, which means they have much less usable energy. They are fine for producing electricity (allowing for intermittency) but it is difficult to impossible to employ them for things such as transport, or industrial heating (including processes such as steel making and cement production). The problems with all the alternatives suggested are both technical and economic—there is the common problem of technologies that are technically feasible but hopelessly uneconomic. The consequence is that we can look forward to not only a stagnation of energy usage but a significant decline, due to the declining EROEI ratio of existing sources (EROEI = Energy Return Over Energy Invested, the ratio between the amount of energy gained and the energy that has to be expended used to get it). This has very obvious and extensive implications, which most people have not started to consider.
One point that Smil spends a lot of time exploring is the question of whether the final stage of the transitions will be a move to greater “‘dematerialization”’ brought about by the combination of greater wealth and increased difficulties with energy supply. The argument is that the pattern of the economic transition is for increasing productivity in which resources are used ever more intensively to produce ever larger amounts of physical output. As with all processes, this faces diminishing marginal returns and, eventually, what is increasingly produced are not physical products that require inputs of raw material and energy but immaterial ones where the only major input is time. These are not subject to the limits that restrict the continued growth in the production of physical products and services. All of this is very similar to the speculations of J. S. Mill in his consideration of the steady state towards the end of his Political Economy and again raises all kinds of fascinating questions as to the implications for our current economic, social, and political arrangements. Smil himself is too cautious and respectful of the limits of his evidence to come to a firm answer although he clearly thinks that this route of dematerialization of economic life is probable.
This book is a great starting point for anyone interested in exploring finding out about Smil’s work and thought for the first time—even though it is his latest work—because it is in some ways a summation of the main themes and arguments he has explored over the years. It is also a wonderful read for anyone interested in the question of what exactly the difference is between the traditional world and the modern world and how we got from one to the other, with a wealth of solidly grounded information—Smil’s work of synthesis saves much time in going to the original or, alternatively, points to where to go to look further. It is also a work of great interest for people interested in political thought, or philosophy, or cultural analysis inasmuch as it presents us with a clear challenge: if we are indeed coming to the close of a three- hundred- year period of transition from one steady state to another, how will that affect the way we live and order our affairs, and how must our thinking change?
*Dr. Stephen Davies is the Head of Education at the IEA. Previously he was program officer at the Institute for Humane Studies (IHS) at George Mason University in Virginia. He joined IHS from the UK where he was Senior Lecturer in the Department of History and Economic History at Manchester Metropolitan University. He has also been a Visiting Scholar at the Social Philosophy and Policy Center at Bowling Green State University, Ohio. A historian, he graduated from St Andrews University in Scotland in 1976 and gained his PhD from the same institution in 1984. He has authored several books, including Empiricism and History (Palgrave Macmillan, 2003) and was co-editor with Nigel Ashford of The Dictionary of Conservative and Libertarian Thought (Routledge, 1991).
As an Amazon Associate, Econlib earns from qualifying purchases.
Inflation – Will It Or Won’t It?
Inflation – Will It Or Won’t It?
Authored by Bill Blain via MorningPorridge.com,
“Inflation is like toothpaste – once you got it out,…
Inflation – Will It Or Won’t It?
“Inflation is like toothpaste – once you got it out, you can’t get it back in again.”
Forget everything you think you know about inflation. It is not solely a consequence of “monetary phenomena”, but largely about the behaviour of crowds. That’s why it’s so dangerous to growth and markets.
After a torrid week for markets as Big Tech got spanked, and bonds rallied on a risk-off move following the mixed employment data, there is a distinct feeling of uncertainty and more pain to come in the December markets. Bond yields falling as inflation fears multiply is a very mixed message… but hey-ho, these are the markets we live in..
Aside from the pandemic, politics, geopolitics and all the other bad stuff that riles markets, the inflation threat has been the most threatening known unknown that will make markets nervous through 2021. Inflation is nailed on to remain incendiary and volatile through the coming year – adding more angst to markets as participants ponder the consequences. It’s a massive threat to markets, society and economic growth – whether it is real or not!
The big news was Jerome Powell, Fed chair, finally admitting the post Covid inflation we’ve seen building over the past 18 months is anything but “transitory”. That’s come as something of a surprise to many analysts who went with the central bankers dismissing inflation as a likely short-lived issue, a mere post-pandemic hurdle that would swiftly be passed-by. Over coming weeks sentiment is likely to shift towards worrying about new long-term inflation scenarios as the inflation numbers remain stubbornly high. It’s difficult to imagine an inflationary scenario that’s positive.
Inflation is currently running a shocking 5-6% across the Western Economies – for how much longer, or how much higher is a “how long is a piece of string question.” We don’t know. Many economists still expect it will fall. Inflation is now in a spiral of supply chain hick-ups, wages, earnings and contradictory expectations. Inflation may ease tomorrow. It may not. We just don’t know how the consequences will play out.
For instance; one aspect of the unexpected consequences of inflation are fears stagflation will boost rising pandemic populism, leading to protectionism and the end of globalisation – a less connected global economy is likely to prove inflationary, especially in terms of increased tariffs.
What is most frightening is how little financial professionals – from central bankers, investors and traders – really understand about what inflation is and how it emerges. Much of the market simply accepts the monetarist argument inflation is “everywhere a monetary phenomenon” as an irrefutable truth that can’t be denied.
Monetarist traditionalists assume you can address inflation by addressing just one aspect of it – the supply of money. Oh dear… Markets are so much more subtle than simple monetarist imperatives. The next time some “expert” tells you inflation is all the fault of Governments borrowing to much, ask them to explain why. What a vast number of market participants don’t get is inflation doesn’t follow rules – it follows sentiment.
Government’s and central banks have been stuffing the global economy with liquidity for the last decade, but its only in the last few months the Pandemic shock has crystalised real inflation. Why…? Because inflation suddenly became a real fear after it remerged due to supply chain shocks.
Let me coin a new mantra on inflation: “Inflation is everywhere what people fear it might become…”
Conventional wisdom assumes inflation can be mitigated inflation by cutting liquidity; central banks raising interest rates (tightening), while Governments can raise taxes and cut spending programmes (austerity). These monetary arguments are theoretically logical, and can be backed up by historical data – but they are loaded because if you tell the crowd inflation is coming, they will probably believe it.
Financial markets work because participants are constantly evaluating every nuance of information to determine future prices. Prices are but a reflection of the market putting together everyone’s perception like some enormous voting machine. Inflation is just a particularly important part of the economic picture influencing the market vote at present. Should we let us panic us?
Maybe not – we’ve just undergone a period of unmatched and sustained global monetary creation though the past 12 years – since 2009. Stock prices have tripled – posting massively higher gains than the relatively lacklustre economic growth we saw over the same period. It’s financial asset inflation pure and simple. It’s happened because stocks look relatively cheap to ultra-low interest rates, and central banks have been pumping liquidity into the financial system (in the hope of creating economic activity) via QE.
The result is massive financial asset inflation on a cause and effect basis: make money cheap and financial assets will rise.
(Conversely, that’s why everyone predicts a stock market crash when rates (the price of money) rise!)
But long-term Financial Asset Inflation since 2009 has created a whole series of massively destabilising consequences. The rich have become phenomenally richer – buoyed by soaring stock prices. (These are likely to be the same people telling us government borrowing and spending is bad…) Expectations markets will only keep going higher have sucked in legions of retail investor convinced they’ll also get rich (only if they stay lucky). The results of chronic inequality, political blindness and insane financial optimism make for a hopeless unbalanced and unfocused economy.
The real value of the global economy is not the market cap of an electric car company worth trillions, but the number of electric cars being produced and sold. (These are very different metrics – one is perceived future value, the other real value.)
Inflation in the real economy is not just cause and effect. It’s a constantly evolving perception and expectations led threat. It changes as the votes with the markets change and the behaviours of economic participants change.
The supply chain crisis as the global economy reopened triggered a host of consequences around the globe. What’s happened has been complex, and spawned a host of unforeseen knock on effects. The coronavirus, and successive lockdowns are still throwing new shocks into the system – as a result the system is becoming increasingly chaotic and impossible to predict as the threat board keeps changing.
This is roughly how its worked:
Economies around the globe shuttered themselves through lockdowns and working from home.
Goods become scarce – from construction lumber to microchips at both micro and macro level, from local shortages to national level.
Prices of scarce goods rocket – often temporarily till new supply leavens shortages.
However, workers perceive higher prices and demand higher wages to compensate – triggering wage inflation.
Prices become elastic to the upside and sticky to adjust downwards.
Companies raise margins and prices to meet wage demands, fuelling further wage demands and declining demand.
The intricate balances between demand and supply become increasingly chaotic, and more so when new Covid lockdowns raise new supply chain threats.
Throw in an energy inflation spike and you create a recipe for disaster.
The key thing is not that inflation is simply due to the consequences of too low interest rates (the monetary phenomenon) or rising government indebtedness (pumping money into the economy), but is due to the expectations of crowds towards perceptions of rising costs.
In crisis human behaviour tends to become increasingly difficult and fractious to predict. The unpredictable behaviour of crowds makes Central Bankers policy choices fraught. Traditional inflation responses like austerity, raising taxes, tighter monetary policy, are as likely to cause market instability and generate increased expectations to push inflation as to ease it.
The time to cut liquidity; the amount of money sloshing around the financial system was long-time ago. That money – that’s fuelled financial asset inflation – is now pouring into the real economy in terms of buying real assets like property, pushing up real inflation.
Its complex. And likely to remain so..
Business As Usual Despite Omicron
True Portfolio Diversification Includes Owning Some Alternative Investments
Now Or Never: The Great ‘Transition’ Must Be Imposed
Escobar: Russia Is Primed For A Persian Gulf Security ‘Makeover’
Canada’s Labour Market Exceeds Pre-Pandemic Levels as Income Support Programs Phase Out
The Fed Says the U.S. Is Now Officially In A Real Estate Bubble
Bull market over? Crypto traders turn fearful after Saturday’s flash crash
Berkshire’s Charlie Munger: Market “Even Crazier” Now Than During DotCom Boom
DAX index forecast after new measures for the unvaccinated
Key Events This Week: CPI, Jolts And Consumer Confidence
Precious Metals4 hours ago
Looking for Leverage? Silver Sands at a Sub $10 Million Valuation Offers the Highest Leverage Drilling Play Around
Energy & Critical Metals4 hours ago
Baselode Reports High-Grade Uranium Within 15.5 Metre Mineralized Zone at ACKIO Discovery
Precious Metals3 hours ago
Top Silver Stocks To Watch In December
Economics57 mins ago
Business As Usual Despite Omicron
Base Metals22 hours ago
Omicron: More Transmissible, Less Severe Due To ‘Common Cold’ Mutation?
Articles24 hours ago
Marvel Discovery bolsters “multi-commodity” portfolio with acquisition of uranium project
Precious Metals4 hours ago
M&A: Dolly Varden and Fury to Consolidate Emerging Canadian Silver-Gold District in BC’s Golden Triangle
Precious Metals4 hours ago
M&A: CopAur Minerals Acquires New Placer Dome Gold Corp.