Why do I spend a certain amount of time harping on inflation in this Technical Analysis blog? True, as a Technical Analyst, I am primarily concerned with trend, breadth, and sentiment. But, we need to keep economics and monetary policy in view. This is discussed in greater detail in my Online Trading Course. A primary rule discussed in my course is: “Don’t fight the Fed”. You’ve seen for yourself this rule work over the years. Low inflation = low rates = rising stocks. High inflation = rising rates = falling stocks. True–It all shows in the trend. But knowing what the Fed is doing, or is likely to do, matters.
Tightening creates the pain cycle. But that’s the price to reduce inflation.
“Powell is going to hear it (Sen Warren) on the hill next week – Reverse Robinhood – with $4.8T of consumer credit (auto leases, credit cards, student loans, home equity lines of credit, etc) – every 1% move hits the little guy and gal with $40B of extra interest costs” – BearTraps
Fact of life: Tightening will slow spending, which slows the economy, which causes consumer distress. This pain, in turn, fights inflation. Its next to impossible NOT to allow the pain cycle to work its intentions – and achieve the desired results of fighting inflation. Invoking the pain cycle is the point of the exercise! I’ve discussed this in past blogs.
Interesting to see how socialist governments STILL don’t understand that printing money to “help with inflation pressures” creates more inflation. Biden is currently trying to push a bill for student loan forgiveness to the tune of $430BB over the coming years. Where does this money come from? Printing more money adds to money supply, which increases inflation. Duh! Don’t forget, they are already approaching a debt ceiling crises – having overspent & over indebted the nation. Same goes with the Trudeau/Singh NDP-erals $5.3BB “free” dental program – and ongoing friends & family print & giveaway programs.
“It seems sensible to assume that this will add to pressures on measures of core inflation” as well as “aggravate the Bank of Canada’s stance on monetary policy. Any belief that it will ease inflationary pressures must have studied different economics textbooks”. Derek Hold, Scotiabank head of capital market economics Sept 2022- on the NDP-erals “spendy” ways to “help with inflation”.
Lessons from the 1970’s
The Fed and BOC must maintain a tight policy until inflation gets down to its historic norms. That’s 3% (forget the 2% fantasy) – which is still near half of where we are now. The pain cycle MUST continue! Adding to money supply is counter productive to invoking the pain cycle to reduce inflation. Again…duh! I’ve written previous blogs about the mistakes the Fed made during the 1970’s by easing up after an initial tightening policy. Here’s a chart from 1973 illustrating action on the SPX. Note the false breakout… could this be the case today? Compare the 1973 chart to the current chart below it…
Here’s today’s chart:
Here’s a chart I’ve used before on the CPI cycle of the 1970’s. Check what happened to inflation in 1973 when the Fed tightened, then backed off. It came back with a vengeance a few years later.
Inflation / government policy matters to investors
Check the 100 year Dow chart below. A lost decade in the 70’s where the Dow Industrials literally couldn’t pass 1000… until 1982! This is the result of poor financial policies by the Fed.
Inflation matters, government policy matters, and completing the Pain Cycle matters! So – watch CPI, watch the Fed (and BOC), and watch for “duh” counter productive money printing. It matters to your portfolio.
Keith on BNN next Monday
I’m on the show Monday March 6th at 12:00 noon. Be sure to call in with your questions. I do my best to get the producer to prioritize blog reader questions, so mention you read my blog. Hey–it also helps me if you mention you read the blog on air–spread the love!
Here’s the contact info to ask a question. Note, calls are prioritized over emails, so best to go that route:
The S & P 500 will perhaps drop to 3,000 or as in the worst scenario (Covid 19 panic, S& P 500 at 2,300 levels ). Taking the lessons of the market collapse, at that time, some stocks clearly maintained themselves quite well, thank you, while others simply depended too much on a normal or favorable economic climate. Perhaps a revisit to that period of time, and taking lessons of that can help investors clean up their portfolio, at least until the infllation is under control, and there is a pivot in the Fed’s stance.
The speculators and short sellers (hedge funds) will be delighted.
Hi Keith , whats you view on slowly getting in the bonds ETFs like XLB , XGB . At some point the fed and BOC will put the rates on hold and then pivot . Isnt it no brainer to start looking at bonds ?
According to Dave Rosenberg thats 20 % upside .
Thanks , Mike
Absolutely Mike. Bonds look forward, just as stock markets do. Best thing to do is look for the base then breakout
One thing I notice the XLB and XGB are not very liquid , would you suggest anything else for CND dollar account in ETF world to give me government or corporate bond exposure .
Thanks , Mike
Mike – ETF’s are held close to market value of their underlying securities. So you usually don’t need to worry about liquidity – IMPORTANT- you do need to go to the bid (if buying) or ask (if selling) with a limit order. Sometimes putting in a limit order with a penny or so over/above the price you want is a good strategy. The market maker on the ETF will keep the price tight to NAV – but you need to use limit orders not market orders
Its good point Keith , I will keep my eye on , looks like 2022 was one of the worst years for bond investors and the sector start to looking attractive.
Keith, might I suggest a video on this topic?
Mike’s question and your answer have caught my interest, but playing this angle (bond ETFs) for profit is an unknown strategy to me.
Good input–I will do a video or blog on the bond outlook
yeah , that will be great Keith .