Strong Market Move and More Inflation Confusion

Dear Traders,

I am back to the Vancouver office, getting ready for our seminar next week in LA as well as our boot camp that starts on September 6. There’s still room for our one-day seminar. You can RSVP here for it. Our boot camp is 65% sold out. I hope to see many of you participating in it. You can RSVP here for the boot camp.

The market is ripping as I am writing these words. We had some nice trades on AMD today in the chatroom, but Brian ended his day in the red, and I ended up with some overtrading but an overall good result. You can watch our recap here.

These days, we can’t stop talking about inflation. We heard at 10am ET about the University of Michigan’s inflation survey, which caused some volatility, and that stopped me out from a TQQQ trade, but now we see the market is moving back up. The survey gave us a read-out on how average American citizens on the street expect price pressures to evolve in both the short and long run. Everyone is concerned that the Federal Reserve will have to wrestle with elevated inflation for a long time, but the funny part is that gauging inflation and inflation expectations is actually more of an art than a science, if measuring the price of mayonnaise is anything to go by.

There has to be a limit to increasing rates, and some other elements of the economy should also be worked on. Gas prices need to come down, supply chains need to be improved, and so on. To just keep raising interest rates to levels near inflation, like 5-6%, is not strictly the best and easiest solution to lowering inflation. It essentially crushes consumers through high mortgage and loan payments. With interest rates now hovering around 5%, existing home sales are down more than 14% from last year. Some potential buyers are sitting on the sidelines until rates, or prices, or both decline. And in Canada, homes could lose as much as a quarter of their value as market declines set off by rapidly rising interest rates play out much faster than anticipated, according to Desjardins Securities Inc. As well, remember, when you are in a mortgage, you are in a leveraged investment, and a 25% drop in housing prices, such as what we may see in Canada, can wipe out the whole equity of your house for years to come. Central banks can therefore not be that hawkish forever, and the market knows that very well.

For now, risk assets such as the Nasdaq-100 and small caps are recovering, with IWM reaching nearly $200 per share. (As an aside, Ardi covered his short with a loss.) We will be keeping an eye on the market to see how it goes over the next couple of weeks.

What do you think? Memories of the all-time highs from last year are still fresh in everyone’s mind. Is there a chance we will see those all-time highs again anytime soon?

To your success,
Andrew