Meinung

The Black Swan Is Flying

Once again, the stock market relies on the Fed in the event of major turmoil. Yet, in today’s inflationary environment investors can no longer count on monetary policy. Time’s choice to name Elon Musk person of the year will be a memorable market top signal. So better hedge your bets.

Charles Biderman
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Deutsche Version

The U.S. stock market is at an all-time high as evidenced by the S&P 500. Individual investors this year have been pumping record amounts of new money into Equity Exchange Traded Funds (ETFs); after having put no new money into equities over the past decade. (Inflows into equity ETFs have been roughly equal to redemptions from equity mutual funds since 2011).

Corporate America has announced in 2021 a record amount of stock buybacks. Even after the Federal Reserve recently announced it will stop printing new money and start raising interest rates next year, the S&P500 rose.

My recommendation: Purchase long term puts on Tesla and Bitcoin. Why? The Black Swan is flying and is now pre-ordained to land sometime soon.

As if I have been saying for the past several years in op-eds here on themarket.ch, stocks will keep rising for as long as central banks keep printing money. The primary source for the 2011-2021 bull market has been newly created money chasing relatively fewer assets.

That is now turning the other way. Central bank money printing has been declining since the middle of 2021. By early next year the Federal Reserve will be raising interest rates and redeeming debt instead of printing more dollars.

Total Assets of Major Central Banks

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Federal Reserve
EZB
Bank of Japan

Wall Street truly believes that if the S&P 500 drops 20% or more in early 2022, the Fed will restart the printing press to protect the stock market. However, if inflation is greater than wage gains, politics would dictate that inflation trumps stock market help.

Red Flags in the Bond Market

Historically, as Jim Bianco of Bianco Research points out, the stock market is a lagging indicator of a financial bear market. The leading indicator for financial markets has been government bonds. The U.S. bond market is having one of its worst years in history. The 2-year Treasury bond has had its worst year ever in terms of lower prices (lower prices create higher yields). Hedge funds that leveraged up to buy the 2-year bond have suffered disastrous losses. (Parenthetically, given the amount of leverage held by brokerage firms, if the yield on the 2-year Treasury surges to 3% from around 0.6% today, most brokerage firms will have all their net worth destroyed).

Yes. The 60% of Americans that own houses and stocks have had a great 2021. Americans have received huge amounts of pandemic money from the U.S. government. What we have done with that money has been to buy goods and throw money into the stock market.

S&P 500 Market Cap

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Inflation is a monetary phenomenon. Newly printed money to Americans has created a boom in retail spending. That boom in spending has created lots of orders for goods – more orders than there are goods. The supply chain does not have enough capacity to deliver all the goods wanted.

More money chasing relatively fewer goods creates higher prices. Higher prices, all else equal, are called inflation. Even though Wall Street conventional wisdom says this gap between supply and demand will shrink over time and therefore inflation is transitory. The reality is that the gap will not be shrinking anytime soon. What’s worse, imbalances will get higher if the spike in Omicron covid positive tests creates slower economic activity.

Therefore, until the U.S. economy slows, inflation won’t recede.

Inflation Becomes a Political Issue

Remember 40% of Americans do not own homes nor stocks. Given inflation that is growing faster than wages and salaries; those 40% are now making less net take home pay than before.

That 40% is not happy. How do we know? Look at President Biden’s shrinking approval rating. With the 2022 elections now less than a year away, either growing income more rapidly or slowing inflation will become the Democratic battle cry.

Wall Street conventional wisdom believes inflation is transitory, therefore net incomes should rise as the gap between supply and demand shrinks. But if inflation is not transitory, the Democratic battle cry will be: Shrink inflation even if that causes a stock bear market.

What’s more, Wall Street conventional wisdom is that if the stock market starts tanking, the Federal Reserve will ride in to save the day by printing more money. But this Democratic U.S. government cares more about take home pay of the 40% non-home and non-stock owners. Thus, the Fed will not save the day.

The Government bond market, by looking at futures pricing, is predicting three to four rate hikes by the Fed in 2022 up to the mid-term Congressional elections. Higher interest rates, on top of an economy with production bottlenecks and pending greater restrictions on economic activity is likely to lead the U.S. and global economy into a 2023 recession.

In my most recent themarket.ch op-ed I opined that stocks and crypto currencies would keep going up as long as more newly created money was chasing relatively fewer assets. Now that money printing is ending, more assets chasing less money is my definition of a bear market.

Those assets with less or no underlying value as a cash flow generator will go down the most. There are now over 1,400 crypto currencies with a $3+ trillion market value. Tesla by itself has close to a $1 trillion market value – but in reality, generates virtually no cash.

That is why I recommend buying long term puts on Bitcoin and Tesla.

Charles Biderman

Charles Biderman in 1994 founded TrimTabs Investment Research, a data service that tracks supply and demand of shares of stock and the money to buy them. On this basis, he also launched an Exchange Traded Fund in 2011. The current version is listed as TrimTabs Free Cash Flow ETF (TTAC-Bats). Over the years, Biderman has been regularly interviewed by CNBC and Bloomberg TV; and began his career with the investor magazine «Barron’s Financial Weekly». Today, he lives on the Big Island of Hawaii. Charles invites you to come visit his Hawi Plantation Guest House, a rich historical landmark located on the northwest point of the island. He shares his insights into markets and money on charlesbidermannews.com where you can find his videos, financial consultation services and courses. Charles also recommends viewing his 2017 video blog, Why Women and Minorities Will be Running the Social Media World by 2040.
Charles Biderman in 1994 founded TrimTabs Investment Research, a data service that tracks supply and demand of shares of stock and the money to buy them. On this basis, he also launched an Exchange Traded Fund in 2011. The current version is listed as TrimTabs Free Cash Flow ETF (TTAC-Bats). Over the years, Biderman has been regularly interviewed by CNBC and Bloomberg TV; and began his career with the investor magazine «Barron’s Financial Weekly». Today, he lives on the Big Island of Hawaii. Charles invites you to come visit his Hawi Plantation Guest House, a rich historical landmark located on the northwest point of the island. He shares his insights into markets and money on charlesbidermannews.com where you can find his videos, financial consultation services and courses. Charles also recommends viewing his 2017 video blog, Why Women and Minorities Will be Running the Social Media World by 2040.