The arrival of the bullish stock market with the return of optimism
optimism? really? yes. The spread of media tidings Always They happen just as bad things end. why? Because the problems and the results are very clear. In the stock market, when things are known, they are already priced. What comes next is the key. This time around, there is a shift in the works because those negatives carry important positives. So get ready for optimism.
The three big negatives that are actually positive
Three negatives were the root cause of widespread stock market seeding. The volatile underlying construction of the stock market is a sign that the positive reality is making progress.
- The Federal Reserve is Not tighten – Minimize easy money policies
- inflation Not Uncontrollable and extreme – Can be managed and moderate
- US economy Not Entering slack Continuing positive GDP growth
Federal Reserve Board Strict inflation’s words are stronger than its actions. And although interest rates are no longer zero, they are still below the rate of inflation – the point at which “tightening” can begin. Until then, the Fed’s easy money machine continues to produce, albeit at a lower rate. Then there are the several trillion dollars that the Fed has “printed” by buying demand-deposit bonds created. The Federal Reserve has not yet begun to reduce the excess money supply that is still circulating.
Regarding inflation, CPI address 9.1% is inaccurate. In my last two articles,Inflation: scare tactics without understanding” And the “Inflation dynamics indicate a slowdownExplain how real inflation is much lower. A serious concern is the rate of “fiat money” inflation – that is, the loss of purchasing power due to excess currency. This rate is currently hidden due to other price hikes coming from abnormal events and actions (the fallout from Covid 19, supply shortages and geopolitical turmoil). The rate will probably be around 5% – the point above which the “real” (inflation-adjusted) 3-month Treasury yield becomes positive again (it’s only 2.4% now).
That 5% level is also the point at which the Fed could actually start tightening – If he still wants. Despite this, there is a possibility of correction of abnormal price actions, resulting in lower reported inflation. If so, the Fed can claim success and, more importantly, capital markets will return to setting interest rates without Fed intervention.
Note: The Fed’s control of interest rates since 2008 should be seen as an experiment. Not allowing capital markets to do their job of setting prices (interest rates) for more than 13 years means that this US government agency has single-handedly bypassed the process of allocating key resources to capitalism.
Now, talk about this recession
A major common concern is that Fed tightening preceded most recessions (albeit by varying lengths of time). However, as explained above, making money less easy is not tightened. Instead, it is a healthy slowdown to reduce speculative growth.
Now cited as evidence that a recession is underway is that “real” GDP growth was negative in the first quarter and could be in the second quarter as well. The prevailing view is that double quartile negatives define stagnation.
Let’s deal with this popular opinion first. this is not true. The National Bureau of Economic Research (NBER) determines if and when a recession will occur after examining and evaluating all relevant conditions. Since no two recessions are alike, this assessment necessarily takes time (several months) and uses both objective and subjective analysis. The time delay is the reason for creating the dual shortcut “rule”.
Now let’s move on to the problem of arithmetic: exaggerated inflation. This is a 3-step process:
- First comes the nominal gross domestic product: $6.0 trillion (13% increase from $5.3 trillion in Q1 2021, down -2.3% from Q4 2021)
- Second comes the seasonal adjustment (SA) to moderate quarterly GDP growth rates that follow a regular seasonal pattern: down in the first, significantly higher in the second, moderately high in the third and significantly higher in the fourth. Therefore, Q1 SA adjusted to $6.1 and Q4 SA adjusted downward to $6.0. These amounts changed the quarterly growth from a nominal decline of -2.3% to a 1.6% increase in SA
- Third comes the inflation adjustment To determine the “true” growth rate. Here lies the problem. It was calculated by adjusting GDP’s “implied deflation factor” by 2% (more than 8% annually). This reduced the seasonally adjusted growth rate of 1.6% to “real” (0.4)%. However, this inflation adjustment contains unnatural components that can be compared to the CPI. An exact inflation rate of 6.6% or less would erase that negative result.
Note: The Fed’s preferred measure of inflation is PCE (Personal Consumption Expenditures) excluding food and energy. For the first quarter of 2022, this rate was 1.27% (5.2% annually). For comparison, the CPI rate excluding food and energy was 1.58% (6.5% yoy).
Bottom line: optimism is coming, so own the stock
This slowdown is undoing excesses, and higher interest rates are reviving moribund growth engines — many areas that have been hit by close to 0% interest rates. As interest expense rises, borrowers will become more rational. And with higher interest income, the economy will get good support from the owners of all those trillions of dollars of short-term assets. Moreover, investors will again have options that all produce returns equal to or greater than the inflation rate of “fiat money”.
All of the above means optimism is right around the corner, so it’s time to own the stock.