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Inflation Panic: Will It Keep Soaring?

Inflation Panic: Will It Keep Soaring?

The markets have gone mad. Inflation panic is out of this world. What’s going on?!

We’re looking at the big picture today. And that includes:

  • Bonds.
  • Housing.
  • Auto sales.
  • Supply chain.
  • Interest rates.

Markets anticipate. They don’t wait.

And the only set of securities that have priced it in are our stocks and bitcoin. They’ve pretty much gone straight down.

But when people realize that all of this was hype and fear, there’s going to be a giant rally.

We’re talking big. So we’re going to back this up with some forecasts.

Come midnight December 31, 2022, here’s what we predict for: oil, the 10-year bond rate, one America 1.0 stock that is clearly destined for zero, bitcoin and ARK Innovation ETF (NYSE: ARKK):

 

 

Paul Mampilly: Good morning, Ian.

Ian Dyer: Hey. Good morning, Paul.

Paul: Friday morning episode of the IanCast. Are you ready to go?

Ian: Absolutely.

Paul: How are things up there in Maryland?

Ian: They are good. It’s been warmer the past couple of days. It’s nice. It actually got in the mid-50s yesterday. That was a blessing.

Paul: Did that snowstorm go through you?

Ian: Not really actually. We didn’t get too much. That was nice that stayed away from us too because we’ve had some bad ice this winter. Hopefully it stays warmer.

 

The Markets Have Gone Crazy!

Paul: You know what’s getting warm? Segue in a bad pun way. The markets are getting warm. We’re just going to get right into this. This interest rate stuff, this inflation stuff — what the heck is going on? The markets have gone mad. They have gone crazy.

This is from Goldman Sachs. While everyone thinks the brokerage companies know everything, they just follow the data. This is proof of this.

Goodwell tweet

This is from Michael Goodwell’s Twitter account. He always finds cool stuff. It’s definitely worth a follow for sure.

Goldman Sach’s analysts raise their expectation for Fed rate increases to seven this year, Ian. Seven. Seven this year. The Federal Reserve is here [moves arm down] and the market is way up here. What is going on?

Ian: It’s crazy. If Goldman Sachs said that four or five months ago they would have been laughed off Wall Street, but now it’s acceptable. The market is pricing in around seven rates hikes this year right now. It’s crazy to me.

Paul: And we’re going to come to some data points. The folks who say we are whacked and don’t know what they heck we are talking about, listen to this. This is also from Michael Goodwell’s Twitter account. He has good data.

The data is that investors pulled $1.5 billion — not trillion, remember the Treasury market is a multi-trillion-dollar market so $1.5 billion you just have to take it with some context. It’s not a large amount in the grand scheme of things. Investors pulled $1.5 billion from bond ETFs on inflation fears.

But there’s more.

Goodwell tweet

hmm, that’s weird…

Then this one again will tell you there is some seriously whacked expectations. This one is a head spinner for sure.

Goodwell tweet

Remember, that was a time when there was a lot of money pushing in. Let’s set the stage here. Inflation gets reported at the highest rate in — I don’t know, go look at the headlines. 30 years? Whatever. I don’t remember. Seven something percent.

You have Wall Street which has historically been a contrarian indicator — most people don’t know that — telling you there are going to be seven consecutive rate increases. There are people calling for insane measures like 50 basis point jumps, inter-meeting jumps — all kinds of insanity.

All while people are buying stock, selling bonds, including inflation-linked bonds. I put up a tweet talking about where bond prices tell you where the new information is, which is in options. I shared that information with you. Reconcile this, Ian. Panic about inflation, bonds being sold, which theoretically plays along.

Stock flows in? That’s interesting. I don’t think that plays with that narrative because theoretically high inflation would mean higher interest rates. Generally speaking, higher interest rates makes stocks less attractive and bonds more attractive. For bonds to be selling off is weird.

Let me grab that tweet because it was mind blowing to read.

Paul tweet

This tweet, which I actually took from an article on Bloomberg, shows that foreign investors are piling into U.S. bonds, buying a record percentage of the Treasury’s 10-year note at auction.

For those who are unaware, auction means the new bonds are sold, I believe, monthly. If you want fresh supply of bonds there’s no other place to get it. You can buy existing supply or you can buy new supply. However, the newest pricing comes at the auction and it’s where the buyers are most sensitive to new information.

This is where they would be most sensitive to inflation numbers. I put up this tweet

Paul Tweet

They are going up, but they aren’t spiking. Long-term bond investors are very sensitive to inflation, so they should be selling instead of aggressively buying bonds at the auction anticipating future lower interest rates.

Somebody wrote me on Twitter and confirmed what Michael Goodwell is saying.

 Thien Nguyen, paul

They said they are selling bonds, look at TLT. The two biggest ETFs that I track for bonds are TLT and IEF. One is 7 to 10-year bonds, TLT is an approximate proxy for the 30-year.

I wrote him back and said you have to look at the auction demand. This is where billions in new bonds is being priced and this is where the newest information is represented. In that article from Bloomberg it says

Bloomberg Article

Remember, we’re talking $37 billion versus the flows in the ETF which were $1.5 billion and 10-year notes which were stellar. This is the way the writer described it. This was in an article that was very negative. They were really inflation panicked. This is a person who is looking at the data and is very confused as to what is going on.

Let me continue reading.

“It was stellar no matter how you look at it. In a sign of big demand, the securities drew a yield of 1.904%, below the 1.926% they were trading at in the so-called when-issued market just before the auction.”

I won’t get too much into it, but the when-issued market essentially anticipates the auction and it’s where people sort of pre price what is going to happen.

“Not only that, but investors submitted bids for 2.68 times the amount offered.”

In other words, for every dollar of bond that was offered, 2.68 dollars’ worth of demand was there. That’s a very high level.

“A level exceeded only two other times for that maturity, going back to early 2017.”

Nearly five years. This is significant time during which we’ve had a lot of ups and downs, including other points where the Federal Reserve was looking to interest rates. He goes on to say,

“Want more proof? Indirect bidders, a group associated with foreign central banks and other institutions…”

In other words, big money. In the bond market, it’s very sophisticated and very good.

“… were awarded 77.6% of the securities offered, which is a record in data going back to 2003.”

All these crosscurrents are coming in. I’ve talked for a while. Now you go for a bit.

 

What Happening With The Supply Chain?

Ian: I was going to say that compared to the $1.5 billion that came out of the ETF, this is 100 times more important. Not only is it 30 times as much money that was bid in this auction, they also demanded a lower interest rate than the pre-auction rate, which was 1.926%.

They wanted less than that. Also, they put in bids for way more than actual bonds were being offered. It was mainly central banks and big institutions that wanted this. Clearly they’re not seeing this inflation being long lasting. That’s reflected in the 10-year bond which, as you pointed out, hasn’t spiked yet.

They are paying attention to things like rising inventories and other things that suggest this inflation is going to be short lived. As we have pointed out multiple times recently, the inventories in the last GDP report were crazy high. I think it was maybe the second-highest level of inventories in the past couple decades.

Paul: Wow.

Ian: When you have that much supply, and it’s only going to build up from here, that inflation is going to level off. A lot of these things are in consumer goods like cars. Then you have other commodities that are trailing off right now like natural gas a bunch of other different things like base metals.

We have gone into this multiple times. This auction was one of the biggest things and a lot of people seemed to have missed it.

Paul: I also did some reading before coming on. The supply chain issue around shipping is easing. At present, the count is just a mere 71 ships sitting offshore, which a month ago was more than 100. Merchandise is starting to ship through.

Remember, everybody at every level of the supply chain has over ordered. We are going to have a glut of historic proportions. That inventory number from GDP is telling you this is about to get significantly worse.

Ian: And we’ve seen some other data that suggests housing prices are going to level off in the near future and that’s been a big driver of inflation too.

Paul: You pointed out to me yesterday on Slack that you have seen mortgage applications have responded to higher interest rates and there are fewer mortgage applications. That’s going to slow the housing market.

Ian: For sure and for the foreseeable future because that’s not an immediate impact either. I can’t remember the exact number, but I know it was more than 10% that mortgage applications are down. People are in a total panic about inflation. They are not going to want to do something like buy a house.

There are interest rate fears. If interest rates go up a lot that’s not good for mortgages. That’s going to have a lasting impact on home prices. Like I said, that’s been a huge part of the inflation we’ve seen over the past year. That’s going to have more downward pressure on inflation in the months to come.

Paul: Used car prices, which have been one of the big elements of inflation as it’s being counted have peaked and are starting to roll over in a big way. Just as car inventories are beginning to build in a significant way. We went from a shortage to now every car company — Ford, GM, particularly internal combustion engine makers — are all planning to ramp production.

They see prices are high, there’s a shortage. It’s a natural phenomenon, except there is a secular headwind that people are switching to EVs. For all the hype about Ford or GM, they make 95% of their money based on ICE vehicles. The EV is nothing in terms of what they make.

This is still a bet. The hype is about EVs from them, but all their sales are about ICE. So you have housing setting up to slow. You have cars. These are the two big ticket items. They drive spending. Once you buy a house, you spend on a lot of things.

 

Will We Hit A Historic Level Of Negative Rates?

Those goods are going to be in oversupply. I don’t know, do you think the Federal Reserve is going to get off one interest rate hike? They still have two months left to get more data to come to them.

Ian: It wouldn’t surprise me if they did in March, but I think after that the chances are very low. Then eventually, when we see the effects of these prices going down and oversupply reflected in the market, they are going to have to lower again, drive it all back and it’s going to be a total flip.

We were talking about this yesterday where in the beginning of 2019 and late 2018 the expectations were that the Fed was going to raise rates four times in 2019. They didn’t. They actually ended up lowering more than once that year. That caused a panic in late 2018.

Growth stocks were down 30% to 50% or more. Bitcoin and crypto had that final big crash at the end of 2018. It’s kind of a similar scenario that I could see playing out. There’s all this hype about raising rates. By the end of the year it wouldn’t surprise me if rates are negative by 2023.

Paul: As one of the charts said that we put up, rates are already negative if you count the levels of inflation. However, even at much more modest levels of inflation I believe what we’re setting up for is going to be an historic level of negative rates. That auction is telling you that.

There’s massive demand to push. There’s no yield that is available in the world — that article did go on to say if you compare U.S. yields to Germany or Japan or anyplace else, it’s still relatively positive. Let’s unpack this some more.

 

There’s Going To Be A Giant Rally!

I know readers will say, “That’s all fine. You’ve said a lot of stuff, but the markets are going the other way and you guys keep talking one way.” Let’s put this together for our folks. The only set of securities that have priced in high and rising rates are our stocks.

They have gone down in a straight line from the moment Jay Powell said inflation. They have gone down pretty much in a straight line from that moment on.

Ian: They have. I think that’s part of why Bitcoin has been doing down too. It’s the fear of rising interest rates. I’m not sure how much that would even impact Bitcoin (BTC). I think people still just see it as a growth stock thing because it trades along with growth stocks.

But the riskier stuff like growth and crypto have suffered from this. I think when they do flip course in the next three to six months, there’s going to be a giant rally across these riskier things that have been beaten down.

They are going to price in the fact that all this was hype and fear. Seven rate hikes in a year is silly when you think about it.

Paul: I’m going to say it’s delusional. They want to destroy the economy for the next 25 years, I suppose they can do it. Jerome Powell’s Fed isn’t dumb. When he was first appointed he said he was going to be the hawkish dude. He came in guns blazing. Four interest rate hikes.

Then the same thing happened.

Ian: It seems like it’s going to be a repeat of that.

Paul: The market reprices for the information that is there. We tell you all the time the market anticipate, they don’t wait for the actual event. They anticipate and prices adjust for that. This looks like historically wrong. We have so much inventory coming in.

There was another tweet I retweeted yesterday. This is from someone I don’t know very well. Someone named Chris Burniske. He writes,

Chris Burniske

“One major thing Cathie Wood has taught me is that while people retreat to value when they are scared in the climate of extreme change, such a strategy will eventually not work as many value stocks experience a slow death due to their disruption by growth names.”

We have discussed this in Slack. I have laid it out. Those inventories are eventually going to be pricing pressure. It will first be disinflation because prices will come down from wherever they are. Then you will have outright deflation.

Ian: And we’re also getting to the point where we’re coming up to the highest prices in 2021. Later on in the year, I think Q3, was probably the biggest increases in prices across the board. When this year’s Q3 is matched against last year’s, I think it’s going to be much lower.

I think it’s possible to see deflation in Q3 of this year just because it’s going to be matched against such higher prices from last year. That was when high prices in things like oil and natural gas and a lot of commodities spiked. Some of them have gone higher since then, but a lot of them like natural gas and steel are way down.

That’s something else to consider. The one-year-ago comparable prices are going to be extremely high.

Paul: Then for us growth have discounted, I would say, at least five rate hikes. The other aspect that is interesting is that while not every growth stock has bottomed out, our proxy for our stocks, America 2.0 stocks is ARKK the ARK Innovation ETF and it has run out of sellers.

Ian: I do believe that has bottomed out. It’s been choppy over the past couple of weeks, but once the hype around the interest rate narrative subsides, it’s going to shoot way back up.

Paul: We have one more thing in our favor. You mentioned for the old line value stocks that are no-hopers — people will troll me and that’s fine. Let’s talk in a minimum of one year, but in a few years when these are crushed, their dividends are cut and it’s clear they are no different than Macy’s and Sears.

They are facing a set of difficult comps into very high stock prices. Our stocks face the reverse. Easier and easier comps into very low stock prices.

Ian: Exactly. The growth numbers are still going to be high. We’ve already seen this earnings season that a lot of America 2.0 stocks have seen big buying after reports come out. Software stocks. Off the top of my head I can think of Unity Software. Bill.com. I think Twilio just went up.

Some of these companies in the growth sector have already showed they have bottomed out. Outside of that, I know there have been other ones, even some pot stocks like Canopy Growth just went way up after they reported. Possibly we could see a rebound in that.

In my opinion, it’s long overdue. We’re starting to see some life come back into these growth stocks for sure.

 

What We Think The Price Of Oil Will Be Come December

Paul: And a blessing for my personal preferences, Proto Labs this morning is up and they are indicating that finally the estimates are low enough that they beat revenue. It’s exactly what we want to see. They are generally indicating that for all the panic out there their businesses continue to grow.

Ian, are you prepared to have egg on your face come yearend?

Ian: Always.

Paul: We have to put ourselves on the line. We’re talking big here. We have to back this up. We can’t just talk. Price of oil, December 31, midnight 2022?

Ian: I am going to say $55.

Paul: I am going to say $40. 10-year bond interest rate?

Ian: I don’t know. Maybe 1%.

Paul: It’s currently around 2%. So you’re saying cut in half?

Ian: Yes.

Paul: I am going to go slightly higher than you. It will still be negative in this way. You know, I was going to say 1.2%, but I am going to go with you and actually say 0.8%. I think it will be a stunner. I am not probably going to make my negative rate come true, but I think 0.8% is going to be a sharp indication of where the future lies.

Ian: One more thing about the 10-year. I am looking at the chart. October 2018 it was 3.25%. Less than one year later in August 2019 it dropped to 1.45%. That’s more than a 50% drop as the narrative changed, which I believe will happen again. It might sound crazy, but I do think 50% is possible considering what we are seeing.

Paul: If you were to pick one company, what is the company that represents America 1.0 that today is being hyped that you think it becomes clear this thing is going to zero? It’s not zero at the end of this year, but it’s clear it has a lead weight around its neck and it’s sinking.

Ian: I think you could say any major car companies are in that situation. Probably Ford because that one has just generally done the worst out of all of them. It’s probably the most likely. But then you have things like Clorox, which clearly no one wants that anymore.

Even though that’s a consumer staple and held pretty stable overall during this, that one is an outlier in the amount it’s gone down. I’ll go with Ford.

Paul: I have noticed the move in Clorox. I went and did an analysis comparing what they pay out in dividends, what they’re paying in interest, what their free cash flow is and what levers they have. There’s a good reason why the stock is going down. I would want nothing to do with that.

That would be too easy for me. That one is very clear. Anybody that can do income statement, cash and balance sheet analysis can know what’s going in Clorox. This is a company in deep trouble. They are definitely going to have to cut the dividend. They don’t have money to buy stock anymore.

We won’t get into that. I am going to say ExxonMobil. As oil prices reprice and it becomes clearer there’s a secular shift from ICE vehicles to EVs, there’s no one more exposed to that than ExxonMobil. You mentioned Ford, equally obvious on that path is ExxonMobil.

Ian: True. That’s a good point, especially if we see oil prices come down as much as we think. I definitely think that’s possible.

 

Let’s Talk Crypto!

Paul: One more. Bitcoin (BTC). This year has already been wild. We are going to reup our chances to call this. Where do you think BTC is considering everything we are saying? The 10-year bond at 0.8, you said 1%. We’ve got all of those other elements of oil going from $85 $90ish to I’m saying $40 and you’re saying $5.

You’ve got inflation rolling the other way. If that is the scenario, 10-year between 0.8% and 1%, oil has gotten crushed, where is BTC?

Ian: I still think it’s possible considering all that and all that comes true, BTC could still hit $350,000 this year. I realize that’s a crazy move for 10 months. I still think it’s possible.

I think $200,000 to $250,000 is more likely if we see these things play out, but either way it’s going to go crazy over the next couple years once this current narrative runs out and the things we are seeing start to play out. That’s going to be amazing for crypto.

There’s all these other coins out there that have gone crazy, 100x to 200x over the past year and a half. Those are going to be in for a rough ride. I think that money is ultimately going to flow into BTC. I think a lot of people have forgotten about it for lack of a better term.

Alt coins are going crazy and I think a lot of that money is going to flow back into BTC. I think it’s going to go on a huge run and outperform most of that market.

Paul: In 2017 BTC was $800 at the low?

Ian: Maybe a little more than that.

Paul: Then almost $19,000 at the high.

Ian: It was $750 at the low in 2017. It went to $20,000 there. Then in 2020 it went from $3,850 all the way up to almost $30,000. A 10x move is possible.

Paul: I am going to stick to $250,000. Outside chance by June. Very, very outside chance. I am going to say if I go out a little further and say $350,000 and come into agreement with you for 2022.

In terms of other news affecting crypto, you mentioned something on BTC.

Ian: The El Salvador bonds.

Paul: That’s interesting. They floated $500 million in bonds and they got double the subscriptions.

Ian: I think it was $1 billion they were originally going to do and then it hasn’t been officially reported yet, but there’s the expectation out there that it’s going to be oversubscribed by $500 million. So 50%. That is definitely huge. If they do see more than that, which I think is possible, it’s going to be more incentive for other countries to follow.

There’s clearly demand out there for BTC from these smaller countries because a lot of them have high inflation. They have a lot of people living outside the country and they do remittances. BTC is great for both of those things. It frees them from things like the IMF.

Clearly we have seen the IMF fight El Salvador nonstop since they announced this bond and that BTC was legal tender. I think it’s going to be appealing to see for other small countries interested in BTC, maybe even some that haven’t come public and expressed that interest yet.

We will see. I believe they said the issuance is expected to take place in the second half of March, which is right around the time that the next Fed meeting is when they could raise rates. That’s going to be a busy time. Basically the first quarter of this year is nonstop events between stocks and crypto.

 

Where Is ARKK Headed In 2022?

Paul: We’re going to end this IanCast with one more prediction. The Profits Unlimited portfolio current performance of the equal-weighted portfolio is between -18% and -20%. Since there is a proxy, which is ARKK, which for all practical purposes is an America 2.0 ETF. If you were today given everything we have predicted, what price is ARKK December 31, 2022?

I think it would be a good indication for us as well. It’s currently about $70?

Ian: A little over $73. I’m looking at that and using 2020 as a model where the market got it wrong in the beginning and ended up making up for it. The difference between the low and the close price for the year went from $33 to $124. That’s almost a 4x move.

Being even conservative, this year the low was $64. If it doubles to $130 I think it could even go to $150. So I will say that: $150.

Paul: I am going to put myself out there and have egg smashed on my face from multiple directions. I am going to say it’s going to be over $200.

Ian: I wouldn’t complain.

Paul: We have unpacked a great deal. Hopefully we have made some sense. I am still bullish, optimistic, positive — BOP. I am not thinking the scenario that is being written about and being priced in has any shot at occurring.

Ian: I agree.

Paul: Your turn to say goodbye and I will say goodbye.

Ian: Everybody, thank you so much for watching. Have a happy Friday and great weekend. We will see you again next week.

Paul: Folks, love it, hate it or maybe you like it, I’m still BOP. Be strong hands. This is Paul saying bye.

 

Regards,

Ian Dyer

Ian Dyer

Editor, Crypto Flash Trader

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