Back in September of last year I made a call that what’s playing out now, would:
The TLDR being: inflation was going to run hotter than expected, bond yields would move up, stocks would have to come down, growth stocks would get destroyed and the fed wouldn’t be able to come to the rescue because inflation tied their hands. I suggested value, shorting bond yields and buying internationally. I predicted this would start soon and accelerate early-mid 2022.
I named this upcoming event “The Great Wheeze” - a slow slump based on liquidity exiting.
The response back then was this was crazy talk. Inflation was seen as mostly transitory, it’d peak at 5ish%. Markets were pricing in a couple of hikes (now it's 7 this year). Stocks went on a big Santa rally, value was cheap, NASDAQ was firing on all cylinders.
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First let’s have a look at some of the friendly things people had to say 5 months ago:
I wonder during how many bubbles throughout history has this theory has been suggested and has it ever once played out?
Ivy league economists: "yeah we really don't know. Its impossible to predict a timeline for such things with any degree of accuracy. Here is a 500 page peer reviewed book to prove our points." Dude on reddit: " I've figured it out! T minus 12 months. Guaranteed. Here is 2 paragraphs of garbage to prove my point."
You have no idea what you're talking about and are probably watching too many YouTube videos. I don't know what I'm talking about either, so let's both shut up.
What an absolute joke of a post. You don’t even understand basic yield formulas.
To everyone else, steer clear of anyone who claims "certainties" like this, ALWAYS. This guy is leaving out many variables which cannot possibly be predicted and is grossly over-simplifying something as complex as a year+ forecast.
High inflation will not happen. The Fed doesn’t control it and its appearance is absolutely not a certainty ; that is what the market is seeing and you’re not.
The inflation we are seeing now is purely aggregate demand based, mostly due to high demand and supply chain issues and shortages and the tell tale sign of this is unequal increases
You lost me at certain parts but I admire the confidence
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Key Themes for 22 and beyond.
We’re entering into a couple years of stagnant growth, shrinking liquidity, increasing real interest rates and declining multiples. You can’t price in excess or draining liquidity, liquidity is the tide that all ships rest on.
The economy is not strong like Powell, Biden and much of the media crowd say. Blowout deficits and QE have temporarily plastered over underlying weakness.
Inflation will peak shortly, but will stabilise higher than pre-COVID (4-5%) for an extended period of time (years). Interest rates will still be negative in real terms and so much cash is floating out there. Central banks will have to be more hawkish going forward, so if the market crashes they'll do less.
At the end of the day the Fed and other central banks are in a bind. They won’t be able to increase interest rates above 3-4% to actually fight it. Even if they could, it’d cause a recession.
So the only solution is for developed markets is to devalue their currency. This means extended inflation in developed markets, strengthening emerging market currencies. The era of exporting our inflation to the USD hungry 3rd world is over. You can already see EM currencies starting to edge up.
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How to play it?
First, Russia won’t invade Ukraine, Putin will consolidate his holdings in the rebel regions but won’t go as far as to get hit with real sanctions. A lot of fuss and then things die down. Russian stocks are getting crushed, this is probably close to the absolute bottom so load up on $RSX. Hold for 6 months and make 30%, $RUSL will do better.
With declining multiples and weak customers almost all assets are going to suffer. I think it’s going to be very difficult for the next couple years to do well in anything.
If a 30 PE company growing at 10%/year falls to a 20 PE; it will take 5 years to grow back to even. Rapid growth can negate multiple compression if your entry point is attractive enough.
Growth is going to get oversold, but be careful of what type of growth you buy as most will still struggle. Growth is the answer not value.
Emerging markets are the place to find small, fast growing companies at low valuations. As the inequalities between rich and poor nations are arbitraged away it is a certainty that EM will outperform developed significantly in the long run. Developed markets have mistaken multiple expansion for strength.
Emerging market, smallcap growth in sectors insulated from weaker developed consumption is the sweet spot. Buy in the next 6 months. Look outside China. India, Vietnam, Egypt are all good. India probably the safest but most expensive.
Submitted February 22, 2022 at 01:27AM by ini0n https://ift.tt/ubyi7Yd
