Monday, February 14, 2022

Working Model

 My current working model for financial markets is this:

  1. The flood of new money since 2008 has reached unprecedented highs during the pandemic.
  2. This new money did not initially create consumer inflation because:  (a)Cheap Chinese imports kept prices down and, (b) the extra money inflated  intangible asset bubbles (stocks, bonds, cryptos, NFTs..) plus real estate and luxury items.
  3. Nevertheless, the money flood eventually caught up with reality and suddenly created spikes in basic consumer goods: energy and food.
  4. With basic goods prices soaring, wages and salaries for the working middle class are inevitably next in line.
  5. Corporations are, thus, going be caught between a rock and a hard place: higher input costs (raw materials and energy) plus higher labor costs.  They will certainly attempt to raise prices, but unless salaries and wages go up as well, they will see demand drop.
  6. Inevitably, as costs go up and demand slows or even drops, profit margins will drop too.
  7. Financing costs (interest rates) are also rising sharply.
  8. Lower or negative profit growth equals sharply lower P/Es. 
Can't see how shares and every other Risk-On asset (eg junk bonds) will do well in this environment, no matter what happens with Russia/Ukraine/China (this is a subject for another post).

1 comment:

  1. was thinking about what you said... I still feel the USD is a risk on asset as well... =)