A few clients we work with are asking various questions on inflation, putting forward ideas on where they see the market progressing, certainly given everything that has happened in 2022 so far — it's looking kind of ugly for the long-to-hold investor. Don't get me wrong, this market is turning out wonderful opportunities each day but only for those position takers that are tactically trading setups or basing their investment strategies on more exotic structures.
What I try to do is keep an open mind but also we need to harvest insights from a wide range of people in different fields and markets, and this interview with Stanley Druckenmiller paints some concerning realities in equities today.
Stanley Druckenmiller is an American Investor, Hedge Fund Manager and chairman of Duquesne Capital, and his advice is very much worth taking onboard.
Interview on inflation and what's next | Stanley Druckenmiller [LINK]
Some of the key points from part 1 of the interview:
The bubble has burst with a vengeance, and a lot of excellent companies have been de-rated 60% without a change in fundamentals — Valuations have improved relative to where they were last year.
The Fed was slow in not recognizing inflation in April 2021, but they were still buying bonds in March 2022 — A lot of assets were purchased during that period, and a lot of people have moved up the risk curve and will lose money.
The extent of the monetary policy had resulted in Global Quantitive Easing injecting 30 trillion into the economy, to the point that there was 18 trillion of debt negative-yielding when the world was about to experience 8% inflation.
We're six months into a bear market with a high probability that there is some room to run, and for those that are tactically trading, it's possible the first leg of that has ended.
The possibilities of being a soft landing are pretty remote, historically we have only pulled off two or three in history — we have never had a soft landing after inflation has gone above 4.5%.
Once inflation has risen over 5%, it has never come down unless the Fed funds rate has gotten above the CPI and that figure is currently 8%. The Fed Fund Rate is unlikely to rise that high because the default destruction would be quite material.
That said, once inflation has gone above 5%, it's never been tamed without a recession.
There are a few trillion in savings to chew through, but given China's Zero Covid Policy and what's going on in Ukraine, it's possible we could have a recession in 2023.
The market is not the economy, but the market tends to lead the economy by 12 months.
Home builders declined 50% from their high, trucking is down 40% despite the trucking companies reporting record earnings, and the Retail Sector appears weaker than it should be given the GDP numbers we are printing.
Price Action Versus News, is a weakened predictive tool today. The market is not so easy to invest in, and bonds are unlikely to save you in this bear market. Shorting the US Dollar in the next phase of the bear market looks interesting.
This interview is informative and worth looking at if you want to opinion on inflation and macro trends in the market today.
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