Houston, We Have an Inflation Problem

Inflation Problem

There’s a new pattern when I travel. I find myself in the airport, or I’m enjoying the first day of my vacation, or I’m getting ready to pack. And suddenly, the markets tumble. This trend has worked like clockwork. The last time market momentum went negative before yesterday, I traveled to Amelia Island in March. I had a lot of work to do that week while on vacation managing some trades.

My travel schedule is now a contrarian indicator. Maybe they’ll name an index after my Delta SkyMiles account. But let me offer some insight on what went wrong on Wednesday for the markets.

Momentum Swings

Yesterday’s selloff had been coming for some time. This market has been extremely top-heavy over the last few months. As I’ve noted, Apple, Microsoft, and Alphabet provide serious weight to the S&P 500.

But broader technology stocks – aka growth stocks – have dominated the era of low-interest rates. With rates low and markets complacent, technology stocks could enjoy upward momentum. But the reality is that what goes up will come down.

Cathie Wood’s ARK Innovation (NYSE:ARKK) fund invests in many unprofitable tech companies that might one day change the world. People cheered for her when she bought into these stocks last year. Companies like Virgin Galactic (NYSE:SPCE), which wants to shoot rich people into space.

Other people followed suit. People built funds that just ripped off her strategies. Retail investors followed suit. They might change the world someday, but their balance sheets are junk.

And when people started pouring out of their tech losers over the last few weeks, she’s been doubling down. That’s not how you’re supposed to invest. More challenging times are ahead.

The Inflation Problem

Investors have raised concerns about rising interest rates since the Fed slashed its benchmark rate at the onset of the COVID crisis.

The Fed has said it would allow the economy to run hot, even if the inflation problem surpassed the benchmark rate of 2%. Of course, yesterday’s reading for April showed a rise of 4.2% year over year. Keep in mind, that’s the official number from the U.S. government. If it feels like everything else has gone up at a breakneck pace, it’s because it has.

The era of cheap money, supply chain disruptions, and frenzies over commodities has reached its first true warning sign. At least for those people who weren’t paying attention.

I believe this will be one of the most inflationary periods in history, even if there is an effort to suppress the actual figures. The cure for high prices is typically high prices. If someone is incentivized to make more products for more money, they’re going to do it.

But when you have supply chain woes and the Fed dropping money out of the sky, this doesn’t have much of a comparison historically. I’ve spent my years studying rare events, financial mania, and wild speculation.

I’d like to compare the current inflation problem to the years the government lifted price controls after World War II, the OPEC crisis in 1973, or Stagflation in the late 1970s. But I can’t. And I am humble enough not to try to predict how this situation ends. Doing so would lead me to seek data to confirm my bias and ignore opportunities to pivot.

I know that the Bureau of Economic Analysis takes oil and food prices out of the Core CPI number. The explanation is that these commodities are very volatile. Yes, they do rise and fall. But oil, corn, soybeans, wheat, and gasoline have been going straight up. It’d be nice if someone acknowledged this outside of the cranks like me.

It is going to be a wild ride in 2021. We thought that things were getting back to normal. Things are anything but ordinary. And we’re not even halfway through May.

Exercise Caution

Trying to predict the short-term tops and bottoms of a market is extremely difficult. That’s why we use series of momentum indicators to find clues on when big institutions are heading for the exits. We also use some large hedges to protect ourselves from the downside.

My indicators went negative on Tuesday afternoon, which typically encourages me to tell people to move shorter-term trading systems to cash. But with the right hedges in place, a severe downturn can quickly provide returns as the markets move back to equilibrium.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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