The market is always meant to be right and it’s meant to be efficient and therefore always impossible to outperform. You will highly likely go broke fighting that and believing it’s not efficient and about 50/50 right or wrong. The market does an amazing job pricing. Now you can disagree with a price but that’s likely simply a factor of not understanding how the market prices that asset.
Betting against the market is fruitless, but what is not so fruitless is betting on changes in the future.
For example, the price of stocks is obviously wrong in the U.S. They are incredibly overvalued. Every trillion-dollar stock is worth $120-plus for every person on the planet, which must be wrong but the market doesn’t agree one jot and you can short those companies into your own personal bankruptcy as much as you like.
What you have to predict is where the market doesn’t have a view or doesn’t care to. This view is often the long-term view, because the participants do not care much for what is going to happen two years or more ahead, let alone five.
So the investor can do the right thing and buy a tracker and forget about it or he is faced with backing ideas no one cares about or has thought about, or go for big calls where the market is split 50/50 with an important opinion and simply can’t make up its mind.
Then you have to call it and invest accordingly.
The current big call remains inflation versus deflation, or in some corners what color of inflation we are going to get. So the call is now inflation versus stagflation versus deflation.
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You might read the media and believe inflation is consensus, but it’s not, because if it was gold would be above $2,000 an ounce right now.
What do people think is going to happen to stop inflation? The answer is they think central banks will step in and raise interest rates to stop inflation because central banks consider inflation to be the evil enemy of humankind and will risk economic implosion rather than suffer inflation. They believe in “‘transitory” (short term) inflation now, stomped on shortly by the Federal Reserve et al when inflation gets any more spicy.
It could happen… but it won’t.
Instead, when you hear the following you can tick the “no monetary tightening soon” box: “Inflation has been running below targets for a long time so we can afford some inflation slack.”
If the central banks want to kill inflation it’s a simple thing to do, if you have the stomach for the pain. Instead central banks spouting bamboozlement will simply mean inflation is fine with us for now.
The markets are so used to the central banks actually being anti-inflation that a huge percentage of the participants believe they will stomp inflation with higher interest rates. Meanwhile others believe the inflation cat is out of the bag and won’t go back in for many years to come. This balance keeps gold in check.
This is why the market is quivering at every Federal Reserve statement, because the old orthodoxy implies imminent tightening because otherwise inflation is going to get serious. Inflationists see that central banks are in a corner because of the damage to the global economy brought on by the “war on Covid,” which will take years to repair, and inflationary policies are the traditional balm for that transition.
The good news is we have a clear signal for bailing out if the Federal Reserve is going to pull the plug on the market and with it inflation.
Here is the chart:
This is an incredible chart because it shows how consistent economic/market support is from the Federal Reserve, and as long as the market stays on these tramlines the economy is going to be juiced by QE and the market remain a one-way bet. If the market breaks this incredible trend then it’s probably all over for the market for a very long time indeed.
This is the Fed balance sheet and it clearly lays out its plan for everyone to see. The policy is print money, suffer elevated inflation, give the economy time to get itself back to normality and for budget deficits and national debt to get back on a sustainable footing.
Here is the Fed Balance sheet, a score of its money printing:
Both the S&P 500 and the Federal Balance have the same trend and the causation is clear. Either one diverging will signal a high likelihood of those trends coming to an end. While they last, so will inflation run warm to hot and eventually the market will climb off the fence and buy gold.
It might just be already underway but until the Fed has spoken dovishly for a few more weeks the deflationists will still be dragging on the price.
The markets are all down to the Federal Reserve and if you believe they will keep printing for many months to come, then now remains an opportunity to buy.
Chambers won Journalist of the Year in the Business Market Commentary category in the State Street U.K. Institutional Press Awards in 2018.