Discover more from Blackswan shares
The bubble signs were there
Where are we in the cycle
Last summer I was moaning about the internals of the markets and couldn’t wait for St Leger’s Day. Well, that never came and instead markets just kept getting worse. Very difficult to ignore the current macro risks especially the inflation story which kind of turned into a political issue now. And Central Banks ( I mean politicians) simply cannot ignore it any longer: voters demand lower prices. So they have to raise rates as the inflationary pressures are too strong: green is expensive but fossils even more so, due to years of underinvestment. There is also a deglobalisation trend taking place, where the supply chain is moving closer to home so in my view, the inflation is much more structural than transitory. In hindsight, the bubble signs were there: remember the power of the retail investors who via social media almost bankrupt the hedge funds shorting terminal businesses like Gamestop ? The so called meme stocks. Such was the trading frenzy at the time. Crypto mania was even crazier, and the old adage that retail investors are always late to the party proves itself once again.
Trying to predict the stock market direction is a fool’s game, no doubt about that. And I really hope that I’m wrong because we all lose, but my gut feel is that we could be in for a prolonged (years) period of weakness. Bear markets usually last about half the length of a bull market and apart from the covid flash crash of March 2020, the current bull market has been going on for more than a decade. And just as we had valuations above historical mean for a long time, the opposite can happen as well. It’s all about the central banks, and after 12 years of QE and ultra cheap money (nobody thought it would last that long right after the credit crunch of 08-09) , we could be in for a long period of high inflation. This will be a slow process, not an event. On the positive side, the consumer is still in good shape with historically low debt and a strong job market ( but this is more of a lagging indicator) so it will take time for things to get worse. But that could also make interest rates go much higher and much faster in order to break the consumer. Also, parts of the market can still do well during high inflation. So far this year most of the co’s reported in-line trading but as we all know, mr market is a forward looking mechanism. How will those earnings look 6-12 months from now if we have a sharp pullback from the (savvy nowadays) consumer.
Difficult to get optimistic short-mid term and the falling knives could fall even further, we’re nowhere near capitulation.