“You will find only what you bring in…”

~ Yoda

Good Morning.

Ah yes, Inflation.  It is here to stay, to destroy our world, to end all the good things, to wipe out the horizon ahead, to tarnish the rest of our lives – forever.  Besides all of the ridiculous items being expressed by new experts in the press, it is somewhat comical that just a few quarters ago, these same experts howled at the moon about how the Fed was utterly failing at keeping us from the deflationary pressures no one wanted.  The audience is like children screaming for a new toy as soon as they get bored.

But all the “toys” they want to focus on have a common theme:  they are bad outcomes, dark shadows in the mist and scary thoughts about the future.  Imagine for a moment that we are at the highest levels of so many areas in life which are good – never before seen benefits mind you – and yet…fear, angst, new monster aplenty and dire outlooks.  Like a dark cloud, they seem to follow us all around, if we pay attention to the wrong elements.

Never This Wealthy

I’ll get back to “inflation” in a moment.  First though, let’s step back.

The American household has never been wealthier – in many ways.  Let’s take a look at some Calafia data tracking

 

Notice these new records are not just a few bucks higher – the records are set by Trillions of dollars.  Meanwhile for those concerned this is fueled by debt “like the last collapse in ’08-’09”, uh – no

 

What is fascinating in all this breathless press reporting on any of the financial channels is this:  debt, leverage and costs are at levels seen all the way back into the 70’s.  Note you never hear about that do you?  The good news, it is the same for both households / consumers and the government

 

One thing is for sure – taxes from those building wealth are rising.  Note below as the revenues to the government are tracked.  We still believe this is Obama 3.0.  The processes, actions and targets are the same as those 8 years we already experienced.  Welcome the current sloppiness in the markets (covered more below) as when the dust settles out, there will not be a day in the future whereby the use of tech and tech capex will be lower than today

 

Check the spike upward in individual tax revenues (red) and corporate (purple) even as payroll taxes are level while employment is rocketing ahead.  Remember, the latest JOLTs data show over 11 million job openings.   We don’t have that many unemployed people : ). Bring on the robots and avatars!

Profits Surging

This data is straight out of filing returns with the snapshots below showing you the NIPA profits are well ahead of S&P reported earnings…always a solid sign.  Why NIPA?  Usually, one does not report earnings on tax returns when not actually earned. LOL

Records all, across the board

 

 

In that second image above, note:  the data streams compare corporate profits as calculated in the GDP accounts (red line) and trailing 12-month earnings per share (profits from continuing operations) as calculated by Bloomberg (blue line). Not surprisingly, both tend to track each other over time. But since the red line is a quarterly number, it tends to lead the blue line.

Given that – it supports previous noted – reported corporate profits are set to be very impressive for the foreseeable future as a margin expansion wave unfolds.  Why?  Tech.

But Mike, this Chop Stinks

This is the issue that makes trade ranges so effective – as long as one can have patience and stand still – looking beyond the haze and chop and over the horizon ahead.  Recall what trade ranges do:  they churn you to death and chew up every ounce of patience.  They dance monsters across the stage of your mind and convince you that this is only set for bad news.

They work to force short-term traders, with short-term visions to hand their holdings over to long-term investors who understand how the reward system works in the wealth building process:  it ain’t easy for sure.

Here are your major indices below.  Clearly the strongest remain the tech areas of the market.  Sadly, the big 5 now make up a full 35% of the S&P 500’s movements.  They are only set to get larger.  The good news?  They say trade ranges make their last wave when the best get chopped down a notch of two.  The last couple days have seen the front-runners in Tech get knocked back to the nickel seats in several cases.  This could be a solid sign that the trade range holding this market for months is about to wear itself out:

The Broad Market NYSE Composite

 

If it feels like we have been walking in quicksand – it’s because we have.  I’ll give you a date:  May 10.  The broad market is trading where it was on May 10th.

The equal-weight S&P 500 (RSP):

…with minor exceptions, they are all going to look the same in general…long trade range – and chop

 

The DOW

 

Let’s focus in on internals

As covered for you before, one can gain a sense of the internal stretching points by watching a few simple elements – sentiment and internal strength.  Both, for the good – are reaching points rarely seen – and in a vast percentage of historical occurrences – marking very important and long-lasting lows when stretched to extremes.

First – sentiment:

We see it in Fear and Greed and in the AAII.  No matter how you slice it when they get this afraid, running for the hilltops or bomb-shelters in fear is the very last item on the list

 

The image shows you the internal stress by measuring stocks left above their 50-day moving average.  Notice where we are in terms of historical extremes at other major lows.  As ugly as it feels, 6 weeks to 6 months later has always been a good thing

 

What’s important to glean from the data image above?  A few things:

Basically 1 in 4 stocks are still above their 50-day moving average (that is a ton of selling pressure)

Not many periods has seen lower readings

This chart covers two decades!

What were the other periods that looked this ugly? (from left to right)

End of a 2+ year bear market in the “Tech Bubble”

The ’08-’09 Great Recession

The Greece Debt “Crisis” Debacle

BREXIT shenanigans

The China Tariff War

The Pandemic Shutdown

I ask us all to consider this each time it is stressful:

What happens AFTER all those other times where it was equally stressful?

How many times do we need to hear false prognostications that something is going to cause us permanent harm and damage, before we decide that it is best to stand tall in the storm and let the more powerful forces succeed over time.

Ask Yourself…

Does it all make sense?  Do the experts and headline writers doing their very best to scare the sh$t out of you, make any sense?  Worst inflation of all time?  Really?  Ask them, in your mind, to explain this then…

Let me set the stage:  In late March and early April, the experts began the shouting from the rooftops:  inflation is coming…and it only got worse from there.  We have just received our 9th monthly “terrible” inflation report.

And….here are bonds since

 

We are 31 basis point lower than we were in late March at the sounding of the inflation cannons.  We are 65 basis points lower than the week before the pandemic shutdown.  And the rest of the worlds bond markets?   Yawning and several still in negative yields

 

…and to cap off this lesson on runaway inflation, let’s visit the Gold market over the last year – as it MUST be the safety spot for all this inflation chatter no?  Well, ummm, no

 

Enough is – eventually – Enough

As long-term investors, we are saddled with the reality that sometimes, crazy stuff unfolds in the market.  On the day of the “worst inflation” on record is released, Gold is down, bonds are flat and markets are scared.  Hmmm.  Ok, well, chalk that up to one of those days or weeks.  It holds no realistic explanation and surely does not match what logic would tell you.

Therein lies the lesson.

The markets are currently surrounded by fear.  Fear drives nutty decisions, often deeply regretted later in the calm light of day.   Sure, it is easy to say, “Gosh, tech has been hit hard for two weeks now, the run must be over.”  It is even easier to agree with that theme, cut and run.

It takes a different set of perspectives to ask the tougher questions.

Do you really think less will be invested in tech tomorrow, next week, next month or next year?

Do you think companies are going to add less technology to fight the inflation monster ahead?

Do you think there is some old normal we will go back to anywhere in the future?

Do you believe that everyone has it all wrong, except the talking heads on TV?

Here is the Deal

One must answer yes to all those questions – and more like them – to buy into the fear embracing the market now.

It’s ugly.  It’s a trade range.  It’s doing what it is designed to do.  It is filling many with doubt.  It is raising fears in all areas.  It is building the monsters markets always need – to surprise to the upside later.

More people are coming.  More demand is coming.  An end to the bottlenecks are coming.  More pipeline demand is coming.  More housing is needed.  More wealth is coming.  More efficiencies are coming.  More productivity is coming.

Standing tall in the storms takes practice.  Building contrary muscles takes work.  It is not fun.  It is not easy.

Ask yourself this:  Do you think Warren is nervous and selling?

 

Merry Christmas and Happy Holidays to You and Yours!

Travel safe, have fun, be with Family and Friends.

Get ready for a Great 2022 – as this too shall pass.

Until we see you again, may your journey be grand

and your legacy significant.