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Deflation, Correlation, Inflation, Agitation … Stimulation?

Deflation, Correlation, Inflation, Agitation … Stimulation?

Deflation, correlation, agitation, stimulation ... all we are saying is join us as we distill the economic nitty-gritty. Stocks go up, bonds go down and vice versa. Right? Wrong … kinda.

There Is No Magic Bullet

Welcome to Reader Feedback day! The day that is all about you, dear reader.

Well … I mean, every day at Great Stuff is technically about you. But Thursdays, more so. Why? Because it’s Thursday … and I never could get the hang of Thursdays.

Today we dive into the Great Stuff mailbag armed with gloves, masks and a can of Lysol to answer your questions, address your rants and revel in your general tomfoolery.

Our feature presentation comes from William in CA. He writes:

This one came up during a brain break at work. We like to throw out what-ifs to see what others think. Here’s one I thought would be good for you.

Assuming 1) the stock market is overvalued, 2) it is due to chasing higher gains than currently offered by bonds … then how far off is the trend as it relates to total funds in each category? And is this an indicator of how much the market needs to move to see another bottom?

For example, if the current funds balance is $2 trillion in stocks to $500 billion in bonds, but traditional balance is normally 1-to-1.5, then that means $1 trillion needs to move from stocks and bonds, and that is a 50% drop in stocks.

Of course this comparison ignores a myriad of other forms of investment vehicles, but it’s something that came up one day at work. So, what’cha think? Any correlation that may be drawn as we await the next buying opportunity?

— William in CA

Thank you for writing in, William!

I have to say, if contemplating the relationship between stocks and bonds is what y’all do during a “brain break,” I shudder to think what your actual job is like.

Personally, I make memes. But, to each their own.

So, essentially, you want a correlation between stocks and bonds as a way to determine when to start buying stocks again? Correct?

Oh, if only it were that simple! Stocks go up, bonds go down and vice versa. Unfortunately, there’s a lot more to it.

To help explain the situation on a more granular level, I turned to my pal Ted Bauman.

Ted, as many of you know, is Banyan Hill’s guru economist and resident bluesman. He’s also the editor of The Bauman Letter — which I highly recommend. (Check it out here!)

Here’s what Ted had to say:

I think you’re looking for something that isn’t there. There has been a pretty consistent reduction in the amount of money in the stock market for most of this year, but prices keep going up.

You’re falling prey to the fallacy of composition.

First, it depends on how quickly that rebalancing happens. If it’s long and drawn out, the market might not even notice. Day-to-day stock prices are set by current buying and selling activity, and a withdrawal of money from equities and into bonds might just mean lower overall trading volumes but the same prices on any given day.

Second, you still have sectors that experience strong demand for their stocks. Think Big Tech right now. Even though funds have flowed out of equities and into bonds, the overall level of the market keeps rising because that top segment has outperformed by a huge extent.

In fact that’s what we’ve seen for most of this year — the proportion of rising versus falling stocks has been pretty bad, but the rate of rise for those that are still going up obscures that.

Ultimately, all you need to find an equilibrium price in the stock market is one buyer and one seller.

Did you get all that, William?

Adding to Ted’s take, we have external influences on stock and bond prices right now (cough the Fed cough).

The Federal Reserve’s key lending rate is near zero, and it’s pumping tons of cash into the market. That much money — I’m sorry, “liquidity” — kinda throws a monkey wrench into the whole market equilibrium thing.

In a sense, what you’ve inadvertently discovered, William, is inflation in asset prices. Think about that one on your next brain break, and get back to me.

Did Mr. Great Stuff just assign homework?

Remember these two key principles:

  1. Correlation does not equal causation.
  2. The market can remain irrational longer than you can remain solvent.

So, how do we deal with this situation?

Well, we play it safe, for one. Great Stuff has advocated all year for keeping your powder dry by holding gold, Treasurys and solid blue-chip stocks. (More on that front in a sec!) However, we must also look to market research designed to find that next buying opportunity right now.

Big Tech is not the only opportunity out there … you just have to know where to look. And if you liked Ted’s no-nonsense economic take just now, you’re going to love what you see here.

Now, let’s get to the rest of the Great Stuff inbox. If you haven’t written in yet, drop us a line at GreatStuffToday@BanyanHill.com. We don’t bite … that costs extra.

Great Stuff Reader Feedback

All right, Great Ones, you know the drill: You ramble, we ramble back. It’s the pendulum of pitter-patter that swings your way every Thursday.

Let’s proceed to break our brains and dive in, shall we?

Sleeper Stocks

Hello Great Stuff,

My former colleagues had a saying; “Stodge is as stodge does.”

Well, this stodge survived the “Dot Com” era and the Great Recession, and suspect that the pandemic won’t be so different. Scoop up some excellent, and maybe boring stocks, then wait, and collect. Does anybody in this space do this anymore?

Elizabeth F.

Hey, Elizabeth!

In case you need to hear it on a day like today, you’re not a stodge for being reasonable.

It’s why we’ve recommended keeping a mattress-worth of cash in your sidecar. Wait for that market reckoning point where you can pick up well-run, stable bargains like they were but mere dandelions in a springtime meadow.

Besides, boring is a relative term these days. Before 2020, you’d think it can’t get more boring than cleaning supplies. And yet, Great Stuff Picks readers have mopped up a 40% gain in Clorox Co. (NYSE: CLX) since we recommended the stock.

There will be bargains out there for you, me and the whole Great Stuff gang. Just ask Ted Bauman, who just revealed a type of investment that anyone, anywhere can use for the chance to make over eight times more income than you could through dividend-paying stocks.

Curious? Of course you are! Click here to learn more.

Calling Crosswinds

Deflation or inflation? What’s your call over the next year?

 — Reggie

Inflation? Deflation? What's it all mean?

Hate to break it to you, Reggie, but to answer your question, we can’t think of inflation and deflation as an either-or scenario. Here’s the situation, fast and loose…

We already have inflation in the market’s asset prices due to the Fed’s unlimited stimulus. Since the economy and corporate earnings aren’t on the same page as stock prices, that should spell asset-price deflation eventually.

But this market is cray-cray, so who knows?

OK, so the market’s screwy, but we’ve said that for a while now. How about inflation at the consumer level? The prices for goods, both our staple supplies and impulse buys. It’s what most people think of by inflation.

And the kneejerk reaction is to call for inflation, sparked by low Fed rates and cash injection straight into the system.

Where’s the “but” now?

Buuuuut the Fed’s actions only bring inflation if the economy recovers. If the government doesn’t provide more emergency relief and jobs don’t recover, that should mean deflation as people spend less and prices fall to entice more buyers.

You know … it’s the whole supply-and-demand equation. Regardless, this involves making a call on where the economy will go amid a pandemic and an election. So, who knows what’ll happen?

Too long; didn’t read: I don’t think the economy will bounce back as quickly from this as Wall Street thinks. My gut says “deflation,” but only slightly since low Fed rates help mitigate deflation.

That’s it, and that’s that. Long term? Jeez, I hardly want to think past next week.

We’re All Freaks Down Here

Joseph, I appreciate your musical and pop culture references. While reading today’s Great Stuff issue Welcome to the Bank Parade, I keep hearing Big and Rich’s The Freak Parade in my head. An apropos ditty for the current market climate.

Enjoy your writing and insight. Thank you.

— Heath E.

Welcome aboard, Heath! Thank you for your email and readership. Hey, somebody’s got to be unafraid to lead the freak parade, right?

Vague Rants We May or May Not Agree With

The individuals in this country are supposed to be doing what is best for it and the citizens hereof. They don’t know why they were elected or what they are supposed to be doing or care. We are discgusted and do not trust any of you.

Marlene

‘Sup, Marlene. Do I know whom you’re talking about? No. Do I still agree? Probably. Do we hope you write in again? Definitely. On the other hand…

This is a liberal socialist propaganda rag. Full of liberal lies and deceit. Liberals have lied to the American public with empty promises. Promising free stuff as bait, in exchange for their vote. Once the liberal trash is elected they’ll turn their back on everyone, and go back to ripping off the American tax payer.

Please stop sending this crap to my email. By the way, pull your lying heads out of your asses, stop being tools for the liberal socialist party. Unless you’re part of the in ring of thieves.

Your future depends on this election as well. You’re either going to help the people trying to destroy America or you’re for Trump. Keep America free and safe. If you laugh at this, you’re part of the problem in this country, and for that you’re a dumb ass!!!

Mark W.

Is that you, Red Forman?

Is that you, Red Forman? I must’ve forgotten my Trump decoder ring, because somehow Great Stuff turned socialist. Y’all got your Great Stuff wealth redistribution checks this month, right? Sigh…

Well, now I’ve got some advice for you, Mark W. Before you point the finger, you should know that I’m the man. And if I’m the man, then you’re the man and he’s the man as well.

All you know about me is what I’ve sold you. I sold out long before you ever heard my name. I sold my soul to make a financial ezine. And then … you read one!

Man, I miss Reagan.

Great Stuff: Back at the Ranch…

What were we talking about again?

Oh yeah — Reader Feedback. Thanks to each and every one of you who wrote in this week! If you don’t see your name and email above, it appears we have reached an impasse, my friend.

Why not drop us a line? Let us know what you think about deflation, inflation, contagions, bargains and … well, whatever else there is to talk about.

GreatStuffToday@BanyanHill.com. You might just see your email in next week’s edition of Reader Feedback! But in the meantime, keep up with us on social media too: Facebook, Instagram and Twitter.

Until next time, be Great!

Joseph Hargett

Editor, Great Stuff

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