The past year has seen a whipsaw of action in the economy. From sector to sector we have seen booms and some small busts. SPACs were all the rage then have recently petered out. Meme stocks have grown like mad taking out many shorts. Mobs have taken to the street out for blood on any heavily shorted stock that might be undervalued. However, with many aspects of life it gets out of hand at a point. The Fed sees none of this mayhem as concerning. They talk of the inflation as it will be transitory due to supply constraints. We will try to dive into different factors that might be at play which paints a grimmer picture than what the stock market is currently showing.
The economy has made a dramatic turn around from the initial lockdowns but it has been heavily induced by extra money. For long term growth and stability it does not all make sense. Watching all the unemployment fraud and the subsequent lack of continued job growth makes perfect sense. We now have made working from home socially acceptable as well as staying at home unemployed. There is no difference visually so why try to change your situation. Manufacturing is another aspect that is having trouble with endless delays on delivery and ability to get certain components. Employing enough skilled workers for these machines is hard to come by. Even services are impacted by shortages and delayed goods. You now have more people waiting around or unable to complete their job since they don’t have the right materials at their expected price point. Job openings are up for extended periods with signs showing more and more desperation to get workers. Housing is becoming more difficult to find as prices continue to skyrocket with people and companies loading up on real estate. At some point you run out of quality people and projects to spend your capital on. The economy is finally showing these cracks with ever increasing mismatches in economic indicators.
Markets especially in the U.S. are hitting all time highs. In amazement they seem invincible with bad and good data pushing them higher. At this point it’s a wall of worry that pushes them slow and steady where capital is finding little other havens to go to. Market participants have been trained well for this scenario and have put undying faith into buying any weakness. The way to deal with this will be shock and awe as nothing awakens buyers more than a complete loss in their long term strategy.
Inflation is the final key to all this that will determine the future. For many in the U.S. we have never felt or experienced any inflation. Globalization and market efficiency have kept it at bay as prices fell for many goods. The one good that hasn’t recently is food. Doing some basic shopping or visiting restaurants will give you the sticker shock of around 30% prices changes for most items. Either through quality degradation, price increases, or shrinkflation they all have the same impact in that you don’t get what you are used to. This is impacting consumer confidence as people are used to consistency in life and when you make them think about math for pricing increases it’s not a fun experience. Inflation is the main factor that can stop the party now. For years people have complained that money printing might cause inflation, but it never came to realization until now. The same things that kept it at bay for so long can be put in reverse and unleashed to higher levels. China especially with their clamp down of their economy could put inflation at the center of attention. Their actions are peculiar for an economy that has been dominating the past 10 years as they are meticulously setting the stage for a grand reveal. Too many eyes in the global economy have been set on the U.S. but instead China should be the one that is about to make the markets move. The Fed may think these aspects of inflation are transitory due to supply constraints, but the momentum of price increases has little appearance of backing down.
A healthy economy does not have these extremes from end-to-end sectors. When we try to pump up certain sectors that do not need it there are unintended consequences. These extreme stretches of healthy to unhealthy are bound to end in a snap. While they may appear transitory at the moment there are severe signs of danger ahead.