Investing is like Surfing

I read an article this week with this intriguing start:

Inflation Is Coming: All the Trends That Were Deflationary Are Slowly Going in Reverse

But of all potential economic outcomes, the one least anticipated and least priced in, is an uptick in inflation.

Full article:  https://wolfstreet.com/2019/12/04/inflation-is-coming-all-the-trends-that-were-deflationary-are-slowly-going-in-reverse/

Basically he is writing about how governments around the world are poised to shift from monetary to fiscal stimulus, as well as an increase in tariffs which can raise prices.

One thing I like about the Wolf Street blog, aside from it’s unique and international focus on finance (and financial shenanigans), is that it has a lively comments section.  Writing not only helps me to bounce ideas off of others, but it has a way of forcing me to make my views coherent and look at them from other angles, helping me to develop them further.

Anyway, here’s how the comment thread went:

Dec 5, 2019 at 1:44 am

Interesting article. Fiscal stimulus will certainly be a major shift once it happens. It’s a tough environment to gauge though.

Everyone knows stocks and bonds are overpriced, but how can they reverse substantially when CB balance sheets expand to finance these asset purchases?

On the other hand if government spending pushes more money into job-creating, natural resource utilizing activities then you could see an uptick in materials and labor.

Trade wars could easily escalate as Congress works to anger Beijing. Then you get both Warren and Trump talking seriously about anti-trust legislation and it can spook the stock markets a bit.

There’s still a lot of investment money flooding the system which will keep asset prices elevated, but it could easily rotate back away from US large caps at some point. Much of it has to be invested in something, but high levels of financial liquidity can produce large waves in valuations.

I like having about 10% in gold and keeping stop losses tight to make sure I’m out on the early side if money flows shift. It does mean more babysitting of my portfolio though.

Wisdom Seeker

Dec 5, 2019 at 7:35 pm

@John Taylor, exactly how large does the deficit need to be before you recognize it as already-operating fiscal stimulus? I should think that trillion-dollar deficits during an economic expansion would qualify as fiscal stimulus?

Dec 8, 2019 at 4:10 am

The deficits may seem large, but I expect them to get much bigger.

Populism is gaining traction. National debt and deficits are not the primary concern anymore – other issues have been getting the limelight, along with plans that call for more spending.

It’s important to remember that we are just trying to identify and follow the trends, we are powerless to change them. Think of investing like surfing … you merely try to identify a wave, ride it a ways, and go back to find the next one. If you try to fight it you’re bound to crash.

 

Note that Wisdom Seeker has an interesting and succinct point which you can take from a number of angles.  One angle is the question – if the large fiscal deficits we’re producing aren’t causing inflation then what will?  Another angle is asking how can anyone advocate for more fiscal stimulus when current deficits are so large?  I tried to answer both, and I really liked the surfing metaphor I came up with.

I’m going to stop here for now – it’s actually a busy weekend in a number of ways.  I had a planned trip for a week in France leaving tomorrow – both Paris and Strausberg – and the strikes forced some quick changes.  The travel agent said we can still go to Paris, it’s safe … but who want’s to go to Paris just to stay near the hotel and be safe while most sites are closed?  My  mother managed to switch it to London on Friday so we’re planning on everything to do in a week long trip, with a niece of mine who’s never been to London.  Anyways, I’m excited about going.  Travel requires flexibility sometimes, but it’s always worthwhile.

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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2 Responses to Investing is like Surfing

  1. Jared Bockoff says:

    The below is going to be a disorganized information dump for you to digest John. Here goes…

    The Fed has given forward guidance of coming inflation with their flexibility on 2%. Asset inflation is maxed out (demand is spent – “pushing on a string”). Inflation has begun to pickup in the CPI, but has been massive in many other areas. Manufacturing is largely slowing, lead-indicating a slowdown (Europe is well ahead on this). Debt is at a high, as Dalio puts it the world is leveraged long. The Repo market seems to indicate a dollar shortage (theoretically from ZIRP disincentiving bank profits and savings). CPI has reportedly been kept low thanks to technology, but the investment opportunities have ceased (evidenced by CapEx going into stock buybacks, pushing on a string – where money can’t find a home and we get WeWork types of bad investments). There’s talk about money being virtually forced into startups that can’t utilize it, etc.

    Much of what I’m seeing seems to be leading to a slowdown or liquidity/shock. There appears to be little room for this to be absorbed, as well as a high probability of an event happening in the relatively near term (upper historical limits are being reached on numerous levels in regards to GDP, etc.). The dip trend has been to US Treasuries (Feb. 2017?), leading to repatriation and an increasing dollar shortage outside of the US. We know a dollar shortage/strengthening kills EM (debts needing to be repaid in USD). Adding to global defaults, reduced exports…

    And since were talking defaults… Should there be a liquidity crunch, increasing defaults stateside would feed into IG downgrades. Pension funds hiftimg out of downgraded BBB would put upward pressure on high yield (making corporate debt restructuring difficult, feeding into a potential corporate debt collapse). If HYG begins to hurt, equities will certainly dip as carrying costs increase.

    The Fed clearly can’t stomach much of any market dips. If not from CPI inflation, a liquidity crisis would not need to push rates up much to pop (or strongly pressure) the asset bubble – an significantly straining QE purchases of US treasuries. Falling assets would not be tolerated and certainly induce potwntially very significant QE expenditures.

    I’m curious to what level QE could go to before the USD, as a store of value, could come into question or have a run against its reserve status made by rival economic powers.

    Basically it seems that rate increase (via a bond market run or inflation) is the boogie man that could tear down the house. The Fed isn’t magic and can’t extend all problems out for eternity.

    • johnonstocks says:

      We agree more than you might think. I don’t think inflation is imminent – and I’m also very worried about a significant pullback in the stock market. My best performing plays now are in my high yield dividend portfolio with MO as the biggest star. I also exited DIS at $151 as I was aggressive with the stops (I followed it up from $129, and I might get back in, the chart’s screaming to go higher).

      On the other hand – fiscal stimulus worldwide will be a game changer. Just don’t be too early to the party or you’ll get creamed – look for some bouts of high volume buying before committing. I expect that inflation will be a major play when it comes but it is probably still 1-2 years out. Still … I recommend you don’t bet on long bonds like the TLT at this time.

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