Unless you are just in from Mars (or through the space-time-portal on Skinwalker Ranch), you know that everyone in the world, with the exception of US Federal Reserve (aka, the "Fed"), knows that inflation is on the rise. Lumber doubling. Commodities booming. Housing skyrocketing. Even gasoline is moving higher.
But Sir Powel (Fed Chair) says, "What inflation?? We don't see no stink'n inflation!"
Well... actually, Sir Powel didn't say that... he basically says, "Yes, there is a small amount of inflation but it doesn't mean anything because it is "transitory"". Right... As the economy comes out of the biggest self-imposed shutdown in history, the demand for goods and services can't possibly drive prices higher for years to come. No... that's not even an intelligent possibility.
Here is the bottom-line (IMHO):
The Fed does not care about inflation. What they care about are interest rates. As long as “Fed-Inflation” does not cause interest rates to climb, they are perfectly content to continue dumping $120B a month into their QE program of buying Treasuries and mortgage-backed securities.
The Fed is terrified about rising interest rates. With a $32T deficit, debt service on that debt spins out of control if interest rates rise too rapidly to 3 or 4%. They cannot permit rising interest rates (especially rapidly rising interest rates) to occur right now for a whole host of reasons; the national debt notwithstanding.
The Fed has the ability to put far more than $120B per month into their QE program. As long as the US Treasury keeps printing money for the Fed to use indiscriminately, the house of cards will continue to stay structurally sound; the economy will continue to expand; and, the stock market will boom. This will continue until the US Dollar no longer is the world’s reserve currency and the Fed assumes that day will never get here.
The market is afraid that the Fed SHOULD care about inflation and that the Fed has painted itself into a corner by saying no changes in interest rates for 2 more years and inflation is “transitory”. The market knows the Fed has a 100% track-record of overreacting when faced with an economic emergency and when they do overreact, they have inevitably pushed the economy into a recession.
The market is trying to reconcile an out-of-touch Fed that will wake up and slam on the breaks, forcing us into a recession, or (the more likely scenario) start dumping $200B or $300B into their QE program, even to the point of buying equities. If the more likely scenario is the one that actually transpires, market liquidity becomes exponentially higher and the market booms higher. As an aside, this means gold would also likely boom higher (more than doubling) as it has shown to be directly correlated to this second scenario construct.
Conclusions and Opinions:
The market has an 80% probability of dropping to the 20-week moving average within the next few weeks; approximately 3% to 4% lower.
The market has a 60% probability of dropping to the 200-dma; approximately 9% lower than where it is now.
The market will likely (51%) rebound from the 200dma move on to huge higher-highs, or less likely (49%) fall off a cliff into the next major bear market.
The wild card(s) in the above are: 1) Political intervention and/or 2) A major conflict with China or other world nemesis.
DISCLAIMER:
For those of you who live life through extrapolation, I want to be crystal clear... 80% is not 100%... 60% is not 100%... 51% is not 100%... and, 49% is not 0%. The second point... I am just giving you my opinion based on the data that I have seen. The odds of me being wrong on some or all of the above is not 100%, nor is it 0%. Do your own research. Your results may vary distinctly and significantly from mine.
How do these opinions impact my investment (trading) activities?
We invest our money and our clients' money based on where the market "is", the trend it "has been" on, and the "estimated" amount of risk that it will continue that trend in the very near term. This assessment is made daily and sometimes more often, here at Turner Capital.
Where are we right now, when it comes to an investment strategy?
We are about 90% cash and I like that position. The sell-off in the market today had little to no impact on our portfolio models. Stocks are becoming cheaper by the minute and I would like them to move much lower. BOGO is where I'd like to see stock prices get to. I seriously doubt that they get that low, but I'm willing to sit on cash on the sidelines and not start buying again until the market bottoms. That is the beauty of a market-directional investment strategy. We are not afraid to go to cash and we are willing to let the market tell us when to buy, sell or move into inverse ETFs. At the moment, cash is king. But... that moment could change at any time. The good news is, my clients are loving a falling market as they know we will soon be able to buy at bargain-basement prices again... and, I do love the "early-entry" trades... those are the sweetest and best.
Comments