I’ve been writing about inflation here for what seems like years. So here it is against the prognosis of all sorts of venerable experts, including even the Federal Reserve with its ‘transitory’ meme.
Protecting against inflation is tough.
If you are super sophisticated and have very strong nerves you can borrow as much money as you can and sink that into assets. However for most of us its property or stocks that are the obvious havens.
For me the first call is stocks and as I look around there is really no alternative to sink money into than shares in an inflationary environment, if you want size, liquidity and convenience. The trouble is, runaway inflation would pummel stocks.
As such the first call is, are we going to get what the media calls hyperinflation, but in reality is just very high inflation in the 20%+ zone for an extended time, which would destroy the value of cash.
The answer is no. We are going to be 50% inflation of 3-5 years. At worst perhaps 100% but only then if we hit yet more Covid scale trouble in the near future.
The inflation we have now is the inflation we are going to get untill further notice. Where exactly that level of inflation is now is very hard to measure. For a start inflation is not the same for everyone.
I think there is a case to be made to say one way to measure inflation is to look at the increase of the SP500 itself, because it is a wide measure of the US economy, and its prices especially increases in money supply. How else does the nominal value of the US economy go vertical when its and the worlds economies are injured? We know its new money injected into the system, the very same mechanism that created inflation in goods. Its not a perfect analogue but Im sure many people siuffering the effects of inflation would say the SP500’s progress certainly looks more like the inflationary environment they are experiencing.
That aside how do we trade the market in 2022.
So lets say inflation is going to grind on at a similar pace to this year. So stocks wont get whacked by runaway inflation and wil instead catch the tailwind of easy money.
So this is what you might expect.
The S&P 500 is a ridiculously predictable trend. It is because it is a managed trend, many would say rigged.
So while the trend stays good its buy and hold. The 6 months moving average is a good guide as to when to sweet, because we are all going to get anxious when the next money flow dries up mid 2022.
Then obviously the managers of the recovery will not want a crash, so it the trend stops it is likey to go sideways.
Then if it does all you need to do is put a floor in and continue to buy and hold.
The current trend is the thing to watch. It has an incredibly tight range, which underlines stability. While with tapering this linear line may start to curve below that straight line progression, as long as the range of highs and lows stays tight then uncertainty will be low and trend direction highly likely to continue without a correction or crash discontinuity.
Bursts of volatility without big news are what to look out for to suspect problems ahead. Without that sudden change in market action its plain sailing, subject of course to unpredictable emergencies. We will see 5000 in 2022 but probably not 6000. I’ll be bullish and say 5500 in 2022.