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Thursday, December 01, 2022

Market crash or long-term sideways trend?

Without a doubt, no one except a few ghouls wants a crash. Nobody needs one either. Markets do not listen to desires and needs; they respond to the flow of money. There were unprecedented flows and the market reached unprecedented levels.

We now have inflation and I maintain it is not an accident. Inflation is always a function of government policy, although governments always claim “It was not me, I did not do it.” How inflation works is mainly economics 101.

Why do we have inflation?

This graph demonstrates:

The pressure of money made this rally. If they had not filled the hole with overdue currency, the death spiral would have been Bibles. Now comes the recovery through inflation. Actually, it is not a return, which is important to understand as there is no return.

So what is the future direction?

WWIII aside:

  • The market can trade sideways for two to five years, supported by flowing liquidity and in real terms the market will be worth 30% -50% less.
  • The market can collapse and grind back.

The latter will only be caused by an unexpected outcome because the central banks have their grip on the markets and for the time being seem quite capable of manipulating monetary levers to get the system back in balance. However, it is still a long way off with many things going wrong. A $ 2 trillion deficit is only a step back from the rand and will maintain an inflationary situation.

Apparently the US economy is thriving with a 5% increase in GDP, but if you remove inflation, what does growth look like then? It’s going to be a bumpy road.

How to trade it? Buy big dips, buy deep value. And walk carefully. The next few weeks seem kind of crucial, was it a dead cat bounce or the start of a years-long sideways trade? I think we are in a supported bear market, so it is going to be very difficult to make money and even harder to beat inflation.

It’s easy to forget:

In a world where markets are not left to their own devices, this would be the natural aftermath of a stock market boom.

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