Im no fan of being a bear. I’m a long bull and anyone who has read my material here for the last decade or so will have seen me make many bullish predictions of highs that came about. Even over the last year or two while many have called ‘bubble’ and I have not disagreed, I have said the market is still going to bubble and go up more.
The simple reason has been the Federal Reserve has had the markets back. It has real estates back too, because those are the two simple asset classes that affect us all the most and simple levers to support the economy in times of emergency.
It seems that many people do not understand that the ‘inflation’ now in our economies is the only solution to adjust an economy that has just suffered an economic disaster as we have in the last 2 years. The best way to save an economy from a drastic collapse where even good assets become temporarily worthless and almost everyone is tipped into dire straits, is to print oceans of money and let inflation smooth the process of bridging the chasm between disaster and recovery. The smoothest way to do that is to inflate the price of real estate and the stock market.
So here we are near a high point of that process.
However you must stop printing at some point or inflation gets out of control and you go ‘Venezuela’ and the wheels come off the economy in other aweful ways. So the stimulus and printing must stops sometime.
What no build back better stimulus? You can even see politicians turning the taps off. Make no mistake that wasn’t a mistake.
We are at the terminus of printing oceans of money and that is spoiling the stock market party.
I wrote, while the SP500 goes in a straight line you should be long, because this is the sign of linear support from government liquidity operations.
We’ll here we are with that straight line looking suddenly wonky.
To me this signal potential trouble. The narrative about tightening and interest rate rises, which are not necessarily the same thing, spells risk off for market players and if the Fed is really going to hold the anti-inflation line at the current levels then this glorious never ending bull is dead.
Its not all over yet but it is certainly on the cusp.
So the call is, can or will the Fed let the market crash, can it hold up, will it hold it up or will it choose to take inflation out of the economy by letting the economic gravity of the current Covid/Post-Covid global economic situation deal everyone a haricut that the ‘bail-out everything’ strategy of the US government and the Federal reserve, has forestalled.
I think its 50/50, but the half chance of a crash has a very significant downside. For many stocks the crash has already started but that would just be a prelude to much worse.
As such an investor needs to keep their finger hovering over the sell button because without the Federal Reserve ‘having the markets back’ its going to get nasty, quickly.
On the plus side, if you can dodge a big fall and buy the bottom you will do very well and for me this is the situation to consider now.